Not Exactly Rocket Science, is it?

David Burchall writes in the Australian (“the heart of the nation”)

“Tis the season for reciprocity” HERE

“Adam Smith's remarks about benevolence and self-interest are routinely quoted and just as often misconstrued. Smith observes that benevolence is an expression of true friendship and yet our whole lives are "scarce sufficient to gain the friendship of a few persons". Hence, unless we want to beg for what we need like a dog, we are compelled to find some basis of reciprocity on which to conduct life's transactions.
Further, when we choose to address ourselves to another's self-love rather than their humanity, this does not demean us as a human being. Rather, we are saying to them that we wish to deal with them in a relationship of parity, as someone who has something to give as well as something we wish to be given.

So far from giving and exchanging, benevolence and reciprocity, being opposites or alternatives, often work best in harness. Yet this simple, even elementary fact - so well known to everybody who has progressed out of moral infancy - seems to elude all our grandest political reckonings.”

Comment
What a clear understanding of Adam Smith of the famous passage on the “Butcher, the brewer, and the baker" is shown here by David Burchall.

‘Tis a pity that some economists quote the same passage and draw quite different (and wrong) conclusions from it, let alone the scores of theological commentators who use the passage to show how selfish-centred it makes its author, Adam Smith!

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. 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; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.” (WN I.ii.2: 26-27)

Smith describes eloquently the way we all acquire the “good offices” - those things which we stand in need of - as human beings. Mainly by bargaining; by exchanging things we have for things we want.

And neither is this a zero sum game, because people value things differently. In free (in the sense of voluntary) bargaining in the presence of competition (not monopoly), people exchange things they value less for things they value more, that is, a non-zero sum game, with both parties gaining more than they give up.

David Burchall understands these basic relationships; why can’teverybody – it’s not exactly rocket science.

Self-Interest is Not Selfishness

In a post I made on 10 November (see below), Greg Baldwin posted a comment. I would normally just reply to the comment. However, I consider the exchange of wider interest and importance, and to avert it being missed by those who do not search for the rare comments Lost Legacy receives, I post the exchange of comments for wider readership:

“Greg Baldwin said...

Thanks for the comment. Secretly I want to believe that self interest and selfishness can be neatly distinguished, but I'll confess quotes like this from our friend Mr. Smith have not helped me to find the clear distinction:

"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 self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

`Adam Smith, Wealth of Nations’

I'm not sure I fully understand everything Smith is trying to say here, but self-love + self interest do seem to be at least the basic ingredients for selfishness...no?

What am I missing?"

To which I replied:

Hi Greg

Thanks for your comment.

Many people quote the “Butcher, Brewer, Baker” example from Smith’s Wealth Of Nations (WN I.ii.2: 26-27) without appreciating exactly what he was saying. He advanced the same example in the 1762-3 lectures (23 March, 176: vi.46: 348) that he gave in Glasgow University (Smith, Lectures On Jurisprudence, Oxford University Press/Liberty Fund: 1978), hence it was an early part of his oeuvre long before he wrote Wealth Of Nations.

‘Self-interest’ and ‘self-love’ in 18th-century discourse did not mean selfishness and were clearly distinguished.

Bernard Mandeville (1724) celebrated selfishness as a virtue (as did Ayn Rand in the 20th century). Smith regarded Mandeville’s teachings as “licentious” (Moral Sentiments, 1759: TMS VII.ii.4: 306-14)).

Examine the quote: we expect our dinner “from their regard to their own self interest”. But there are two people in each transaction: the hungry would-be diner and the shopkeeper potentially supplying the meat, beer, or bread.

Smith excluded the virtuous motive of their “benevolence” as too weak to rely upon regularly (as common sense suggests it would be, except at the margin). So how is the transaction to be conducted?

“We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

We don’t talk of our necessities in the transaction but address “their self-love” - they are self-interested too! They have gone to the trouble of securing supplies of “meat, beer, and bread” and offering them for sale to potential customers.

The earlier transactions of the “butchers, brewers, and bakers” to secure their supplies (from farmers and those along the supply chain) involved multiple transactions on the same basis. All suppliers need access to freely bargained exchanges to supply their families with their needs from others.

In the sentences immediately preceding the ones you quote, Smith wrote:

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. 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; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”
(WN I.ii.2:26)

This is a clear description of the bargaining processes by which we obtain “those good offices which we stand in need of”.

Each party is self-interested in the outcome, but (and it is an important ‘but’) neither can obtain what they want without addressing what the other wants in voluntary exchange transactions. Two utterly selfish egoists would seldom, if ever, come to a voluntary agreement – neither would give up anything in place of demanding their price “or else”.

As Smith put it, in social converation we “persuade” to get what we want. Highlighting why something (what we offer to give) is good for someone is often a good place to start when seeking what we want to get.

That is the meaning of the paragraph from which you take the well-known quotation (in the process of which you elide from the 18th-century meaning of self-interest and self-love to a later meaning).

To read this as Smith advocating selfishness is quite different from the intended and explicit meaning of Smith's moral philosophy, as expressed in that paragraph.

And that Greg is the answer to you question: “What am I missing?”

Jay Richards on Selfishness

Jay W. Richards, author of Money, Greed, and God: Why Capitalism is the Solution and not the Problem (2009), (15 October) writes in The American (the journal of the American Enterprise Institute) HERE:

"Greed Is Not Good, and It’s Not Capitalism"

“The Virtue of Selfishness?

You might think that greed has been bound up with defenses of modern capitalism from the very beginning. You might recall Adam Smith, the father of modern capitalism, who famously wrote, “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.” Ayn Rand and others seemed to extend Smith’s point by treating greed as the basis of a free economy. There are connections here of course; but Smith never argued that greed is good. His view was far different, and far more subtle.

Adam Smith argued that in a rightly ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness.

First, Smith argued that in a rightly-ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness. The butcher is more likely to give you meat if it’s a win-win trade—if there’s something in it for him—than if you’re just asking for a handout. This is, or should be, common sense.
Second, Smith knew the difference between self-interest and mere selfishness. Every time you wash your hands or take your vitamins or clock into work on time or look both ways before you cross the street, you’re pursuing your self-interest—but none of these acts is selfish. Indeed, generally speaking, you ought to do these things. Greed, in contrast, is a sort of disordered self-interest. Adam Smith, the moral philosopher, always condemned it as a vice.

Third, Smith never argued that the more selfish we are, the better a market works. His point, rather, is that in a free market, each of us can pursue ends within our narrow sphere of competence and concern—our “self-interest”—and yet an order will emerge that vastly exceeds anyone’s deliberations.

That’s the problem with socialism and all sorts of nanny-state regulatory prescriptions: They don’t fit the human condition.

Finally, and most importantly, Smith argued that capitalism channels greed. He recognized that human beings are not as virtuous as we ought to be. While many of us may live modestly virtuous lives under the right conditions, it is the rare individual who ever achieves heroic virtue. Given that reality, we should want a social order that channels proper self-interest as well as selfishness into socially desirable outcomes. Any system this side of heaven that can’t channel human selfishness is doomed to failure. That’s the genius of the market economy.”

Comment
I have criticised many times on Lost Legacy the cynical author of the Hollywood film script, Wall Street, for putting out the “Greed is Good” nonsense. Such a view had nothing at all to do with Adam Smith, either in Wealth Of Nations or Moral Sentiments.

Jay’s article is almost a perfect riposte to the Gekko libel about capitalism except for a paragraph elsewhere in it:

“In contrast, capitalism is fit for real, fallen human beings. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand ... and thus without intending it, without knowing it, advance the interest of the society.” Notice he says “in spite of.” His point isn’t that the butcher should be selfish, or even that the butcher’s selfishness particularly helps. Rather, he argues that even if the butcher is selfish, he can’t make you buy his meat. He has to offer you meat at a price you’ll willingly buy. He has to look for ways to set up a win-win exchange. Surely that’s good.”

Jay compresses two paragraphs together from Wealth Of Nations to make this unnecessary point about the so-called “invisible hand”. However, the example he makes of the “butcher, brewer, and baker” paragraph (Wealth Of Nations, Book I.ii.2:27) is spot on and worthy of wider circulation.

Regular eaders of Lost Legacy will know that Smith was not referring to all “business people” being “led by an invisible hand”, but only to those in a special case when they preferred the home trade to foreign trade, the trigger for their behaviour being their risk-avoidance regarding foreign trade (Wealth Of Nations, Book IV.ii. paragraphs 1 to 9: 452-56).

However, this corection is for the record only and in no way diminishes the excellent case that Jay Richards makes against the elision of self-interest into selfishness. Bernard Mandeville (1734: Fable of the Bees ) and his modern epigone, Ayn Rand, were absolutely wrong about selfishness. Adam Smith (and Jay Richards) was absolutely right about the anti-commercial sentiments of "selfishness".

A candidate for the October Lost-Legacy Prize?

Smith and the Prisoner's Dilemma

John Cassidy writes on: “Rational Irrationality: The Real Reason That Capitalism Is So Crash-Prone” in The New Yorker (5 October). Normxxx comments, parenthetically, on Cassidy’s thoughts in normxxx ruminates... HERE
[[comments in double-square brackets are normxxx’s]]

“Because financial markets consist of individuals who react to what others are doing, theories of 'free-market economics' are often less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties. Much of the work done at RAND was initially applied to the logic of nuclear warfare, but it has proved extremely useful in understanding another 'explosion-prone' arena: Wall Street.

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome. [[What you are trying to do is minimize your maximum possible loss.: normxxx]]

The Prisoner's Dilemma is the obverse of Adam Smith's theory of the invisible hand, in which the free market coordinates the behavior of self-seeking individuals to the benefit of all. Each businessman "intends only his own gain," Smith wrote in "The Wealth of Nations", "and he is in this, as in many other cases, led by an invisible hand to promote [[a socially positive: normxxx]] end which was no part of his intention". But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a clenched fist.”

Comment
There is a mixture of interesting ideas in this part of John Cassidy’s article, “Rational Irrationality”, in the New Yorker (5 October), on some perspectives of which I would put a different slant.

The two-person, single-round, Prisoner’s Dilemma game illustrates the choice between ‘co-operation’ and ‘defection’. Roughly, does a player independently choose to ‘co-operate’ or ‘defect’ (or, say, choose ‘trade’ or ‘plunder’)? This boils down to ‘doing what is best for self’ or ‘doing what’s best for both of us’.

The original Prisoner’s Dilemma (which is why it was called “prisoner’s dilemma”) is actually a 3-person game, with the detectives imposing the pay-offs of the two prisoners' choices, over which they had a contrary interest (law and order) to that of the criminals (getting away with their crimes).

In ‘co-operation’/’defection’ games the players’ gain or lose according to their choices. If one of them defects and is successful, her individual, positive payoff will be larger than the player who attempts to cooperate and loses, with a negative payoff. If both defect, successive rounds will produce losses for both of them (maximum sentence in prison, in which they can 'explain' to each other why they chose the defection option (confessing) to trap the other in not confessing!

If both cooperate (not confess) and are successful, they both gain a positive payoff, smaller than the gainer from an individual defection, but they have the prospect of repeating rounds of positive payoffs for both of them which are better than maximum jsil time. So, strategically, which game are we playing: defection for one-sided gains (which likely leads to mutual defection) or cooperation for mutual gains (which likely leads for successive mutual gains)?

The former is equivalent to mutual murderous plunder in the real world; the latter is equivalent to mutual, Smithian bargaining: “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.” (Book 1, chapter 2, page 26, Wealth Of Nations).

Bargaining is not about promoting self-interest or selfishness or defection; it is about addressing the “self-love” of the potential bargainer by “never talk[ing] to them of our necessities, but of their advantages” (WN I.2. page 27).

Hence, placing Smith’s statements as “less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties” is both a partial misreading of the sophistication of Prisoner’s Dilemma games and a partial ignorance of Smith’s acute observations of bargaining in competitive markets.

As I have taught for years at Business Schools, as sellers or buyers we are not in competition with the seller or buyer with whom we happen to be negotiating; we are in competition with the other sellers who can supply what the buyer wants across the table, or we are in competition with the other buyers who can buy what the seller across the table is selling. Not understanding this Smithian principle of competition is so fundamental, and so widespread among some very smart economists, as to constitute an error of perspective of the first magnitude.

The “optimal joint result” requires us both to do that which is best for both of us, not what is best for us alone. John Cassidy, however, is right in his analysis of the cause of the “madness of crowds” when piling into the insanity of the recent bubble – those who stayed in cash instead, not junk derivatives, survived; those who followed the rush, lost badly. They didn’t do what was best for all of them.

Given that Smith never endorsed a policy of acting selfishly under the fantasy that whatever they did would lead to social benefits (the modern myth of the “invisible hand”), he was not likely to advise anybody to chase the modern equivalent of the “South Sea bubble”. He had a low opinion of “projectors” and “enthusiasts”. So should Smithian scholars and practitioners.

The Hesitant Hand by Steven Medema (Princeton University Press), Part 7

Chapter 6: Marginalising Government II: the rise of public choice analysis)

A central axiom of modern economics has long been the rational, self-interested agent; public choice was largely about the application of that assumption to the political process (from Homo economicus to Homo politicus; with my apologies to Latin scholars).

Among the major figures in this new school were James Buchanan, Gordon Tulloch and Warren Nutter, and this chapter takes a close look at their work and influence, which towards the end of the chapter gets very close with an almost blow-by-blow account of its leading professors struggling to maintain their legitimacy within departmental economics, already narrowing down its core interests within mathematics (‘political economy’ was long dead since Marshall).

Naïve analysis of government relied on almost altruistic officials working for the public good through their conception of a ‘public welfare function’, as if legislators were ‘neutral’ between factional interests and worked solely for the whole community. Buchanan and company were not so naïve
Virginia, where they worked, is very close to Washington, D.C.).

Politicians were not quite neutral, nor were they mere technical translators of the public will into public policy. They too maximised their self-interest (primarily to be re-elected) and they did whatever it takes to build a large enough coalition of voters that supports their election (and re-election).

Disappointedly, Steve holds back from developing an account of the analyses of public choice theory in much detail and refers his readers to Dennis Mueller’s Public Choice (3rd edition, Cambridge University Press), and for the political process model he refers to Buchanan and Tullock’s seminal text, The Calculus of Consent (1962: Michigan University Press). I mention that last book (with Anthony Downs’s An Economic Theory of Democracy (1957) because it was from reading them in the late 1960s that I began my own drift away from student political activism (I even wrote a long forgettable essay applying the general idea of self-interested politics to left and right conflicts in the university).

However, Steve’s account of public choice theory is a neat, clear summary and will inform, or remind, readers of its main ideas, plus an adequate account of the work of Arrow (his ‘possibility theorem’: voting preferences do not promote ‘optimality’) and Black (committees and elections).

As is his outline of the difficulties of the public choice school in overcoming general indifference (and, later outright, hostility) among academic economists, an attitude replicated among academic political scientists. This left a formidable gap between the reality of political processes and the conventional assumptions of democratic political conduct, partly manifested in the lack of attention to government failure, at least not to the degree to which market failure is acknowledged and used to justify government interventions to ‘correct’ the alleged failures of markets.

The last 15 pages of Steve’s chapter is a detailed account of the struggle for the recognition of public choice theory as a scientific subject worthy of a higher status with the subject areas where it rightly claims a place. I shall not review their contents on this occasion, except to say the conduct of (self-interested) academics, while in my view is disappointing, it is also a classic example of the vindication of public choice theory in action – perhaps someone should re-write those 15 pages as a case study.

[Part 8: “Legal Fiction: The Coase theorem and the evolution of law and economics” is up next.

The Hesitant Hand by Steve Medema: Review Part 2

In the ‘Hands of Adam’ Steve Medema shows his class as an historian of economic ideas. I found his account of the role of self-interest in commercial society very fair, without the usual cliché errors found in many accounts.

Starting from the proposition in Moral Sentiments that our benevolence towards others diminishes as social distance increases without damaging the social fabric because all others have degrees of overlapping benevolence right across society, and benevolence is not, and cannot be, the sole, or even major force, for exchange behaviour, and, fortunately for human habitation and procreation, it is not necessary that it be so.

A society, we are reminded in TMS can exist with loving relationships, and it is well when it does, but it can also exist without such feelings provided there is a ‘mercenary exchange of good offices’.

Enter here the famous assertion by Smith of the ‘butcher, the brewer, and the baker’ and our need when engaged in an exchange transaction to appeal to their interests not ours (be ‘other centred’; never selfish). Steve shows that for Smith, self-interest is not a ‘one way street’ – what a lot of senseless twaddle would be saved if miss-readers of Smith would get that right!

Steve correctly sets out self-interest in Smith’s lexicon:

‘that the pursuit of self-interest serves the best interests of society as a whole, that self-interest and the social interests are partners rather than enemies’ (19). Self-interest should be facilitated rather than restrained.

The explanation of why this was true for Smith is wonderfully clear, though, Steve notes, ‘Smith is at once vividly descriptive and maddeningly vague’. Echoing Mirabeau (thinking you serve yourself, you serve others), the individual attempts to employ his capital where he expects to earn the highest return, and in doing so, he generally neither intends to promote the public interest, nor knows how much he is promoting it’, followed by the famous metaphor of ‘an invisible hand’.

Steve comments:

‘An invisible hand – this is a specific as Smith gets. What Smith meant by this is anyone’s guess, and plenty of guesses have been offered, ranging from God to government’. But whatever it is, Smith was convinced of its propensity to channel self-interest in socially useful directs’(20).

I can agree with that formulation as it encompasses Smith’s proper use of a metaphor, which is to explain something by adding ‘beauty’ when ‘so adapted that it gives due strength of expression to the object to be described and at the same time does so in a more striking and interesting manner’ (Smith: Lectures in Rhetoric and Belles Lettres, 1763).

A great deal of wasted ink and paper would be spared if only economists would read the nine paragraphs of Wealth Of Nations leading to the metaphor of the invisible hand and see how simply caps his technical description of economic and social process leading to people thinking they are serving themselves when in fact they serve general society, by his employing the common 18th-century metaphor of ‘an invisible hand’. Steve’s compromise treatment is masterly.

Smith develops the sense of ‘congruence’ (Steve’s word), even ‘harmony’ as ‘some would say’ (I prefer potential ‘congruence’) between private and social interests, to his critique of mercantile political economy and Physiocracy, both of which, Steve shows, inevitably distort by monopolies and misguided government interventions (those promoted by lobbying for special, especially corrupt, interests) and thereby interfering with the otherwise free actions of individuals judging their best interests in moral and legally constrained codes of behaviour and acting accordingly.

Here Steve highlights something that is worth developing (21). The absence in Smith’s work of a critique of the ‘internal logic’ of mercantile or Physiocratic thinking: on their own terms they promote the ends they seek (the accumulation of gold or the growth of agriculture output) – as China seems to be sliding towards in buying up the planet with its mountains of US treasury bills and hoping to hold down peasant incomes.

Smith disagreed with their consequences – state action by the former theories (necessarily at the sacrifice of liberty) versus growth of real wealth (the annual output of the ‘necessities, conveniences, and amusements of life’) through individual self-interest in conditions of liberty.

Steve confronts the conundrum of self-interested actions can be malign. Some voices, bought and paid for, advocate absolute freedom for corporations and individuals, the consequences of which are discussed widely. Unfortunately, the remedies (especially from the environmental lobby) of which involve draconian interventions by uncontrollable governments, agencies and neighbourly busy-bodies, plus ‘that insidious and crafty animal, vulgarly called a statesmen or politician’ (WN IV.ii.39).

Steve recognises that Smith was never a one-track voice for everything changing at once. He was far more pragmatic; never an ideologue. He did not make many predictions, nor did he expect much to change, except ‘slowly and gradually’, perhaps in many cases never quite reaching its end goal. He said as much in respect of free trade ever becoming accepted in Great Britain this side of ‘utopia’.

His message was that competitive markets were generally better than state grand plans. He didn’t even consider that ‘natural liberty’, as was envisaged by the Physiocrats, was a necessary condition for the spread of opulence – if it was, he opined, it is unlikely that any country would ever have progressed towards it (WN ix.28: 674).

Nor, Steve observes, were the necessary roles of government minimal (23) – Smith was not a laissez-faire purist or even near being so. The list of proposed roles for the state, collected in Book V and elsewhere scattered throughout Wealth Of Nations, is quite long, and probably much longer than the purveyors of Smith, the laissez-faire advocate, realise. Steve covers this material with both conviction and economically.

Smith, says Steve:

‘was not, as some have imagined, a proto-modern. Smith’s view of man is not economic man with his rational, single-minded pursuit of his self-interest’. Furthermore, Smith did not argue that private action was optimal, in the modern efficiency sense, nor even that it was superior to governmental alternatives. Smith considered the link between private and social interests partial and imperfect, but he was also of the mind that self-interest, properly channelle, tended to engender positive results, rather than negative ones, and that government interference with its operation in the economic sphere would generally lead to inferior results’ (25).

I think we can sum up Smith’s approach as being: ‘markets where possible; the state where necessary’.

Steve’s last line in this chapter is evocative:

‘Self-interest, then, had finally found legitimacy’.

[In Part 3 we move on to the ‘Harnessing of Self-Interest’ with ‘Mill and Sidgwick and the evolution of market failure’.]

"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.

A Book Review Suggestion

The Hesitant Hand: taming self-interest in the history of economic ideas
Steven G. Medema, Professor of Economics, University of Colorado, Denver; pp 230, Princeton: Princeton University Press, ISBN 978-0-691-12296-2, £24.95

I received Steve Medema's book for review and shortly into it I realised that it is more than ‘just-another-book-on-economics-to-join-dozens more'. It is an excellent, unique book worthy of detailed consideration by economists, historians, political scientists, and social commentators trying to make sense of the way the world works by unravelling the past, recent past, and present at a time when events are throwing up questions about the central ideas that mould the actions of all of us, conscious of them or not.

Its central theme is the idea of self-interest and to what extent interpretations of that idea have shaped explanations, and expectations, of the behaviours ostensibly flowing from it.

The usual two-page review would not do justice to Medema’s scholarship, or his fluency as a writer (for ten years he was the editor of the Journal of the History of Economic Thought and those editorial skills are evident in his selection of which contributions to his book’s subject are crucial from those that are merely interesting).

Therefore, I propose to review ‘The Hidden Hand’ in several contributions to Lost Legacy.

I invite readers to add their comments and contributions as I go through it – it’s a long canter of a journey from Adam Smith’s predecessors to recent debates – and I invite your comments and contributions as my familiarity with some current scholarship is thin enough to warrant your assistance.

I have almost completed my first review-contribution and shall post it this week.

New Book by Steve Medema Looks Promising

Real Time Economics(“Economic insight and analysis from The Wall Street Journal”)carries a Guest Contribution: “The Invisible Hand Isn’t Broken”

“The free market has gotten a bad rap, but the invisible hand was never meant to be completely unfettered, writes Steven G. Medema, professor of economics at the University of Colorado Denver and the author of “The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas” [Princeton University Press, 2009] HERE:

"The idea that the self-interested behavior could be good for the economy did not originate with Smith, but he provided the theoretical ammunition for this view and remains the historical figure with whom it is most closely associated. Smith’s view of things was that businessmen do indeed pursue their self-interest, but that such behavior can redound to the best interests of society as a whole — higher national wealth, lower goods prices for consumers, etc. — if that self-interested behavior is encased within a competitive market environment. This, of course, is Smith’s famous “invisible hand” argument, which has been championed by some as an argument for minimalist government and derided by others as a myth that has been disproved by events."

"But as convinced as Smith was of the utility of the market for promoting economic growth attended by benefits that extend across the population, he was not a champion of unfettered markets. Smith wrote at a time when various government schemes of protection established monopolies across the economy, which generated higher prices for consumers at the same time that they enriched the narrow classes of protected businessmen. He advocated the competitive process as an alternative to that system.
Smith saw an important role for the state within the market process. He was well aware that the unfettered pursuit of self-interest had many pitfalls associated with it, and he wrote at length about the need to embed the market system within an appropriate legal and moral environment, even going so far as to recommend legal ceilings on interest rates to prevent banks from lending large amounts of society’s financial capital for the pursuit of excessively speculative ventures”

Comment
Not quite there yet but definitely moving in the right direction.
From an automatic relationship of individual self-interest to social benefits (usually aided, directed even, by an invisible hand, there is a clear sign that this relationship is qualified by its dependence on the content of the self-interest embodied in it and its context (rule of law, justice, degree of competition, and types of behaviours).

Smith gave over 60 instances of self-interest working against the interests of other individuals in Wealth Of Nationssee footnote 3, Self interest is not always benign as far as Smith was concerned, but not a lot of modern economists seem understand that (most of them have never read Wealth Of Nations).

The Wall Street Journal article recognises this in part – follow the link to read Steve Medema’s important new book – I am about to start reviewing it for Lost Legacy and shall post my review soon.

Which Adam Smith Was Wrong?

Shaun Grovers writes the Schlog blog (HERE):

"ADAM SMITH WAS WRONG"

"At the dawn of the Industrial Revolution, during the Age of Enlightenment, Adam Smith wrote Wealth of Nations. It’s earned him the title “father of economics” and it greatly influenced the founders of America with its argument that free market capitalism was the best economic system available for a society prone to selfishness.

Adam Smith wasn’t just an economist. In fact, at the time, economics wasn’t its own field yet. The best I can figure it was a branch of philosophy mixed with sociology and even a little religion. Adam Smith, for instance, was a professor of Moral Philosophy at the University of Glasgow - not some mathematician or finance guru working as a prof in a business school. That doesn’t discredit him, of course, but it’s something to keep in mind when reading his thoughts: They’re as much a prescription for morality or theology as they are for business practices.

“Adam Smith believed, for instance, that in order for a free market society to prosper, individuals must look out for their own self interests foremost. “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.”

Comment
Smith’s observation was that individuals are ‘self-interested’, an assessment with a long pedigree in classical philosophy long before Smith taught his students. But that was not the problem in itself. The main problem was that people depended upon others, mostly unknown others, for their daily sustenance.

Long gone in Europe were the days when individuals sought whatever they could get for themselves from gathering fruits, roots, insects and birds’ eggs in the forest in ‘rude’ societies that were common before farming and shepherding (and still were common in 18th century experience over much of the world, with a few remnants still found today).

Society was more complex (though fairly simple compared to now) and without mutual dependence, largely from the division of labour and the propensity to exchange, common to all people in Europe, and in the ancient stone civilisations of China and India, the mass of the population would soon suffer grosser privations than was already common. There was not enough subsistence available to support distribution by such benevolence as was present to allow everybody, or a majority, to rely on benevolence for their daily survival. It wasn't that benevolence was wanting so much as it would never feed enough people alone.

Smith addressed the prospects for commercial societies (he didn’t use the word ‘capitalism’ nor have knowledge of the 19th century phenomenon), which if allowed to operate without the oppression of existing state-supported monopolies it would continue the spread of opulence to the majority of the population.

Shaun Grovers jumps into assumptions about what Adam Smith said quite clearly and differently, both in Moral Sentiments (1759) and Wealth Of Nations (1776). Smith did not have an idealistic view about human behaviour – he was an observer of how people actually behaved and not how they might behave in an imaginary utopia.

Moreover, Smith dealt in relatives, not absolutes. It wasn’t that the ‘butcher, brewer, and baker’ would behave like perfect boy scouts; given the chance – particularly the opportunity provided by monopoly, a common enough condition under the Guild system that had controlled the supply of food and necessaries in most towns since the 16th century – the butcher, brewer, and baker would behave exactly as Shaun concludes in the substance of his article. The trader would pay more than likely “an unjust wage to his workers, lying about the quality and origins of his products, making promises for immediate gain with no intention to keep them, etc,” and much worse besides.

The Smithian antidote to monopoly is competition, not as an idealistic model, but as the best known remedy to selfish behaviours emanating from monopoly.

The Acts of Parliament that created state-granted monopolies, which often fostered private cartels and 'conspiracies' against the consumers, were often orginally awarded with good intentions (and we know to where those roads lead), and had by mid-18th-century Britain become barriers to commercial growth, jobs and good health.

Smith’s critiques of such government interventions was severe (see Book IV of Wealth Of Nations) – so severe that modern readers often generalise incorrectly his specific remarks about 18th-century government interventions as his supposed opposition to all government interventions, which is far from the case, as regularly discussed on Lost Legacy.

Shaun writes:

“Adam Smith, like I said earlier, came up with his ideas during the Age of Enlightenment - a period characterized in part by radical optimism about the human spirit, denying that all men are born spiritually powerless and corrupt. Ronald Reagan sounded a lot like a modern day Adam Smith sometimes. He was very inspiring but very wrong when speaking about the inherent goodness and strength of mankind: “A people free to choose will always choose peace” or “I know in my heart that man is good” or “There are no constraints on the human mind, no walls around the human spirit, no barriers to our progress except those we ourselves erect.”

Comment
I do not know where Shaun got these ideas from, but they certainly were never expressed by Adam Smith. This leads me to ask if Shaun has actually read Smith’s works, or is he confined to what others have said that the wrote, plus a few quotations out of context?

“Adam Smith was wrong. Free market capitalism might just be the best economic system the world has ever seen. I assume so, but what do I know about economics? I’m a musician. But it doesn’t produce the rosy results Smith argued it would either. A society full of Smith’s imaginary butchers will not benefit the whole of society because the butcher is not inherently good and self-regulating. He does not naturally pay a living wage to his workers. He does not naturally keep his promises. He does not naturally tell the truth at all times. He’s just like me. And just like you. If we serve ourselves with no outside restraints placed upon us, we’ll cheat to get more and horde what what we get while the distance between us and the have nots widens.”

Comment
Having set up an imaginary straw man and called him ‘Adam Smith’, Shaun concludes that ‘Adam Smith was wrong’. What astonishing insight! Sadly, what nonsense too. It’s not that Shaun is deliberately misleading; he is simply uninformed.

And finally:

“Adam Smith’s error may come from his understanding of God. Adam Smith is believed to have been a deist - someone who thinks “The Great Architect” built the universe but then walked away from it, never to return, never getting mixed up in human affairs, never entering the human heart, never putting on skin and becoming a man for man’s sake, never sending Spirit to guide and teach, never to lead his People to be creators of equality and justice and, well, regulation.”

Comment
Shaun here is interesting. Many make similar interpretations of Smith’s alleged ‘Christianity’ and his alleged providential tendencies, and his alleged Deism, but not as clearly as Shaun does.

However, this would take a lot longer to respond to at this time. I am presently in Denver to read my paper, ‘The Hidden Adam Smith in his Theology’ (in part a response to Lisa Hill’s 2001 paper, ‘The Hidden Theology in Adam Smith’).

Readers interested in the current draft of this paper, which answers in some measure the ideas expressed in the paragraph in his article, should send an email to me: gavin at negWeb dot com.

In sum, Shaun Grovers’ article is interesting but flawed by a reliance on the writings of others (mainly ‘rightwing’ Reagonites it seems who describe a fictional Adam Smith invented in Chicago from the 1950s; though he is not enamoured with the ‘leftwing’ either) and not on the work of the real Adam Smith, born in Kirkcaldy in 1723.

There is a world of difference between these two Adam Smiths, and knowing the differences is important, as well as fairer to the Adam Smith born in Kirkcaldy.

Hyperbole and the Invisible Hand

Walter Williams (Townhall.com) HERE in ‘aconservativeedge’ 18 February writes: “The Invisible Hand Is As Certain As The Law Of Gravity”

Adam Smith: “He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. … By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” And later he adds, “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.”

Comment
Hyperbole in pursuit of making a statement does not improve its merits. In this case, it is almost laughable and certainly inappropriate. Gravity is a phenomenon across the entire universe, not just under apple trees. The invisible hand is a literary metaphor and as such it is not subject to the law of gravity.

The lines that Walter Williams quotes, from Book IV, chapter II, Wealth Of Nations (page 456) have been torn out of context.

Smith is talking about those merchants who prefer to conduct their business close to home and not abroad. He was not talking about all individual merchants. Their reasoning is their concerns for ‘their own security’ (it says so in the rest of the paragraph not quoted).

Risk aversion is well known today, so there is no excuse for not mentioning it (some insure against risks, some don’t). The merchants discussed by Adam Smith coped with foreign trade risks by not trading abroad with foreigners. The metaphor of ‘an invisible hand’ is a metaphoric treatment of their risk-averse behaviour. But many merchants did trade abroad and still do.

At the time, Britain exercised a monopoly of trade with its colonies in North America, enforced by the Royal Navy under the Navigation Acts (1660, as amended). These merchants were less risk-averse than the subject of the paragraph, only partly quoted. For taking the risks they received higher profits.

Apparently, they were not ‘led by an invisible hand’ – a strange omission if you think about it, given the importance of foreign trade in Smith’s analysis.

Next, Walter Williams exposes himself to a doubt that he has actually read Wealth Of Nations. He writes:

“And later he adds, “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.”

But the ‘benevolence of the butcher, the brewer, or the baker’ is not ‘added later’. It comes many pages earlier in fact, in Chapter II of Book I, on page 26, which is long before page 456! It also had nothing to do with Book IV.

What can one say? Not much.

Thought For the Day, no 8

It is often preached (a not inappropriate word in this context) that Adam Smith was a believer in what became known in the later 19th century as Homo eonomicus, or the perfectly rational person, driven by manic self-interest to maximise his personal utility.

In Moral Sentiments (1759), Adam Smith presents a different perspective to the uni-dimensional automaton that modern economists since the 19th century created, and which their successors in the 20th century increasingly refined, so to speak, to make this creature (for surely it was never intended to be regarded as human) fit into the determinate convenient mathematics of general equilibrium.

Smith on a richer, more complex, and more realistic vision of man in society is worth reading – and thinking about:

‘There can be no proper motive for hurting our neighbour, there can be no incitement to do evil to another, which mankind will go along with, except just indignation for evil which that other has done to us. To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or of more use to us, or to indulge, in this manner, at the expence of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with. Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so. Every man, therefore, is much more deeply interested in whatever immediately concerns himself, than in what concerns any other man: and to hear, perhaps, of the death of another person, with whom we have no particular connexion, will give us less concern, will spoil our stomach, or break our rest much less than a very insignificant disaster which has befallen ourselves. But though the ruin of our neighbour may affect us much less than a very small misfortune of our own, we must not ruin him to prevent that small misfortune, nor even to prevent our own ruin. We must, here, as in all other cases, view ourselves not so much according to that light in which we may naturally appear to ourselves, as according to that in which we naturally appear to others. Though every man may, according to the proverb, be the whole world to himself, to the rest of mankind he is a most insignificant part of it. Though his own happiness may be of more importance to him than that of all the world besides, to every other person it is of no more consequence than that of any other man. Though it may be true, therefore, that every individual, in his own breast, naturally prefers himself to all mankind, yet he dares not look mankind in the face, and avow that he acts according to this principle. He feels that in this preference they can never go along with him, and that how natural soever it may be to him, it must always appear excessive and extravagant to them. When he views himself in the light in which he is conscious that others will view him, he sees that to them he is but one of the multitude in no respect better than any other in it. If he would act so as that the impartial spectator may enter into the principles of his conduct, which is what of all things he has the greatest desire to do, he must, upon this, as upon all other occasions, humble the arrogance of his self-love, and bring it down to something which other men can go along with. They will indulge it so far as to allow him to be more anxious about, and to pursue with more earnest assiduity, his own happiness than that of any other person. Thus far, whenever they place themselves in his situation, they will readily go along with him. In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of. This man is to them, in every respect, as good as he: they do not enter into that self-love by which he prefers himself so much to this other, and cannot go along with the motive from which he hurt him. They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation. He is sensible that he becomes so, and feels that those sentiments are ready to burst out from all sides against him.’ (TMS II.ii.2.1: 82-83)

Don't Trust Anybody From Chicago on Adam Smith

Froma Harrop writes in Real Clear Politics Chicago, Illinois HERE:

“In a Q&A last year with the Pittsburgh Tribune-Review, former Pennsylvania Rep. Pat Toomey was asked what book he wanted Barack Obama to read. The Republican quickly recommended the work of Adam Smith, the 18th century economist and philosopher who held that individuals promote the good of society when they pursue their self-interest.”

Comments
The rest of her article is a report on the intricacies of Republican inner-party politics, about which I know little and which also comes under my self-denying ordinance of not commenting on the politics of a country other than the one I vote in.

The question is whether Real Clear Politics in general, and Rep. Pat Toomey in particular will advance their cause with complete a misunderstanding of Adam Smith’s actual observations about the role of self-interest and its impact on society, for good or ill.

The way Pat Toomey is quoted, ‘individuals promote the good of society when they pursue their self-interest’, it is clear from the evidence of human societies that there is no smooth, or even bumpy, relationship between individuals pursuing their ‘self-interest’ and the good of society. No society works, or has ever worked, like that.

Experiments with utopian-inspired communes show conclusively that they are not what some call today sustainable, despite the good intentions of those who shun normal society and found their ideal societies for ideal people. Variously, the next generation becomes bored and willfully disrupt their parents' expectations, or some of the parents fall out, and the little society withers in disillusionment.

But the more telling problem is that real societies do not function as model beneficiaries of the self-interested behaviors of individuals. This should be no surprise to observers of the societies they live in. Adam Smith was one such careful observer. He never said what Pat Toomey, allegedly alleged (I only have Froma Harrop’s word that Toomey did so allege that the words paraphrased as reported, were attributed to Adam Smith (admittedly, a common enough delusion of academics in Chicago and elsewhere).

Now, the fate of Pat Toomey is of little consequence in the big scheme of things, but that it is often alleged that Adam Smith was of a mind to have uttered something similar about self-interested actions, it is this assertion that I wish to correct.

The idea comes from a partial reading of the infamous passage, which for want of a better shorthand, let’s call it the 'invisible hand' paragraph in Wealth Of Nations (Book IV, chapter 2, paragraph 7-9: 455-56). Smith discusses the behaviours of some, but not all, merchants, who from their concerns for the ‘security’ of their trading capital, prefer to invest locally rather than in foreign trade. Their self-interest drives them to choose to employ their capital so as to generate the ‘greatest possible value’, which ‘necessarily’ gives ‘revenue’ and ‘employment’ to the greatest number of people in their ‘own country’, which in turn renders the annual revenue of the local society ‘as great as he can’.

It is this statement that some readers (or more likely, readers of quotes) of Wealth Of Nations draw the incredible idea that Adam Smith believed ‘that individuals promote the good of society when they pursue their self-interest’.

As a statement of the connection between those traders which Smith discusses in the paragraph and the general interest of society, it is of course, true, but whether it applies in all cases, all the time, that is another matter, as a reading of the whole chapter clearly shows. They may do so, but then they may not.

Indeed, Smith was suspicious to put it mildly, all through Wealth Of Nations, of the motives and behaviours of ‘merchants and manufacturers’. A little example, again from Smith, illustrates my assertion.

Consider the motive of the home trader, identified by Smith in the paragraph, but rarely noted by those who quote it:

‘By preferring the support of domestick to that of foreign industry, he intends only his own security [and ] his own gain …’ (WN IV.ii.9: 456)

So far so good, but some merchants and manufacturers easily note a chance to enhance their ‘own gain’, and simultaneously their ‘own security’, driven by their self-interest. Suppose, they may muse, it was possible to persuade legislators and people who influence them that by imposing tariff protection on foreign goods entering our domestic markets, this would raise our revenue (and profits) by the higher prices we could charge in the absence of foreign competition.

Instead of exporting local jobs to foreigners, we could increase local employment. That’s got to be good for the local economy (and, our profits). It is not so good, however, for local consumers who pay higher prices, nor for labourers seeking work, because the increase in tariff-protected employment is not likely to be proportionate (Smith makes this point too; he suggests that it is what we could call an ‘empirical question’).

Yet, Pat Toomey, taking just a part of a particular case, generalises a conclusion from that case and applies it to all expressions of self-interest, and concludes that ‘individuals promote the good of society when they pursue their self-interest’, and, worse, claims that Adam Smith said so.

No Sir! It is Pat Toomey who says so, not Adam Smith, and distinguished as Rep. Pat Toomey no doubt is, his name does not carry the authority of Adam Smith in economic matters, hence he is comfortable to use Adam Smith’s name with impunity.

However, Lost Legacy is dedicated to the restoration of Adam Smith’s legacy; and, as in the Wild West movies, I ‘call him out’. He should withdraw his slur on Adam Smith and present his own ideas in his own name.

Adam Smith is Not Guilty of One-Dimensional Rationality

David Wolfe's Ageless Marketing HERE:

‘The End of a Myth: The Rational Man Theory of Markplace Behavior'

‘This experiment and many more are discussed in Ariely’s provocative new book, Predictably Irrational: The Hidden Forces that Shape Our Decisions. I enthusiastically recommend Ariely’s book to anyone involved in product pricing in any category. You will likely come away from this read with a better handle on how to price products.

Classical economics has rested on a premise that Ariely shatters to smithereens. For well over two hundred years economists have based their thinking on the premise that marketplace trends are determined by the rational behavior of people acting in their own interests. This in fact is the keystone of Adam Smith’s book The Wealth of Nations, the Old Testament of capitalism.

Ariely is not the first to challenge the rational man premise of classical economics. A whole new subfield called behavioral economics has taken root because some brave-minded stalwarts in the dismal science decided the emperor was stark naked. The notion that marketplace trends reflect the outcome of human reasoning in an objectively fathomable world is every bit as illusory as the appearance that the earth is more or less flat.

The cat is out of the bad, so to speak. I would expect to start seeing more accurate economic projections in the future now that such prominent economists as those who wrote the books I’ve cited in this post have revealed just how naked the rational man theory is.’

Comment
David Wolfe bases his article on, ‘Economist’ Dan Ariely’s book, discussed on Lost Legacy earlier this week. Yet Adam Smith’s book, The Wealth of Nations, does not base its ‘thinking on the premise that marketplace trends are determined by the rational behaviour of people acting in their own interests’, where the implication is that all consumers share the same self-interests and to the same degree.

If Dan Ariely has read Wealth Of Nations, Books I and II he would know of the 60 plus incidents in these two books which deal with markets where the self-interests of individuals have negative consequences for others (externalities) and there is no common self-interest that is necessarily shared by all those in the market. People do not buy merely on price (that is a construct of the mathematics of the late 19th century Marshallian demand curve and is an axion of modern neo-classical, not classical, economics).

Even in the simple purchase of examples in Wealth Of Nations introduces a movement of prices: ‘A publick mourning raises the price of black cloth’ (WN I.vii.19: 76-77).

Some people try to buy despite the rise in price; they are in mourning; others do not buy at all – they may be in mourning, they may not be.

Some, but not all, people pay higher prices for a new commodity because they want to be ‘fashionable’, to ‘attract attention’, to ‘cut a figure at a ball’, and any of a dozen other ‘rational’ (to them) reasons. In Book IV of Wealth Of Nations there is a discussion in Chapter ii of the role of the 'delusion' of the 'beauty' or 'fitness' of a contrivance being more persuasive than its utility for soem people - Smith gives it a central role in the motivation of entrepreneurs and consumers.

There is no common rationality. Smith discusses this and more in Moral Sentiments (1759).

Homo economicus was invented as a concept in the late 19th century, not by Adam Smith (he died in 1790). It fits a certain kind of mathematics – the kind that needs to be determinate.

Its sponsors have to find a common explanation, even if their explanation is partial. When used to predict the future, for which large fees are paid (despite the lousy track record), it is at its most vulnerable to ‘events, dear boy, events’.

Behaviourists and psychologists are aware of the variability of human motivation and behaviour. All we have to do now is convince more economists, which, ironically in view of the partial knowledge of Dan Ariely about Adam Smith, means encouraging more of them to read both Moral Sentiments and Wealth Of Nations.

Self-Interest is Not Always Benign

A regular correspondent writes:

‘I don't know if you take requests, but I would love to see one of your posts on the recent interview at the Freakonomics blog about "The Invisible Hook", a new book about the economics of piracy. Here's the link:

Here is the quotation from the Freakonomics article on piracy:

"In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

Comment
The first question is easy: I am delighted to respond to requests about any subjects related to Adam Smith’s Lost Legacy. I receive these regularly by email and I usually replied privately by correspondence, but there is no inhibition on my part from replying via ASLL.

I have also read the article by Freakonomics in the New York Times (link above) and my initial response to the sentence: ‘The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest', was incongruity.

Who suggests that criminals do not act according to their self-interest? Of course they do. They certainly do not act for anybody else’s interests!

When Mugabe authorises maltreatment of opponents by his hired thugs, he acts in accordance with his self-interest as he sees them. Indeed, Adam Smith gives 60 instances of people acting according to their self-interest but not in the interests of others in Books I and II of Wealth Of Nations, and these people’s actions certainly did not benefit society as a whole, nor were they intended to do so.

That’s part of the problem with the Freakonomics’ approach: it seeks the rational motives behind people’s actions, when rational decision-making can have non-beneficial consequences for those affected by the decisions. But the Freakonomics authors, ingenious as their explanations often are, sometimes fail to find unanimity in the decision makers’ cohorts – not all members of a cohort, sharing, say, the same characteristics as gang members, become gang members, or take drugs, get pregnant, or kill anybody.

So the pirates ‘driven to build systems of government and social structures that allowed them to better pursue their criminal ends’ is only part of the story.

Smith noted a significant and relevant point in this regard:

‘Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.’ (TMS II.ii.3.3)

Now, pirates in the 17th and 18th centuries were composed of experienced seamen and their officers. The learned their trade as seamen in the merchant marine and the Royal Navy. Both sections of the shipping business had many shared customs, some of ancient vintage. For example, in times of severe scarcity, food from a captured seabird’s carcass was divided among the crew by the venerable system of ‘who shall have this?’ and not by the captain’s prerogative.

One seaman turned his back of the divided segments of the bird and another seaman pointed to a piece of dismembered bird and asked ‘who shall have this’. The crew member who could not see what his colleague was pointing at would shout out a name, and that piece, whatever it was – beak, feathered tail, webbed feet, or succulent breast – was allocated to the man whose name was called out. This happened to Captain Bligh and his boat crew after the mutiny – the men were amused (quietly) when Bligh received the feet on one occasion.

So, much of the so-called drive ‘to build systems of government and social structures that allowed them to better pursue their criminal ends’ which were merely simple rules for self-preservation, and, as Smith put it: ‘any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another’, because ‘the prevalence of injustice must utterly destroy it.’

Now fast forward to Somalia and the pirate menace to shipping.

The first big difference is that 18th-century pirates sailed large, self-sufficient, and well-armed and fast ships, crewed by excellent seamen, and captained by proven leaders who could keep the crew in order according the conventions among pirates. Everybody received a share of the loot according to their station (much like Prize Money paid by the Royal Navy for captured foreign vessels).

The Somalia pirates are in a different league; their ships are less seaworthy, their crews number a half-dozen men, and the ships they board are defenceless largely. Their leaders, judiciously, are on shore, not on the little boats. They take the bulk of the loot obtained – ‘independents’ are rare – and they launder the vast sums with the efficiency of banks through high-level international contacts. When a heist goes wrong, it’s the boys in the bum boats who die, not the shore-based quasi-bankers.

‘For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively’.

Pirates do not create nor destroy wealth; they redistribute it. Plunder as an alternative to wealth creation is as old as, if not older than, voluntary exchange. Hijacking a lorry full of merchandise is not different that sea-born piracy and regularly happens inside all major economies.

The nature of an activity does not alter the self-interested activity of criminals, polluters, spoilers of the commons, kleptomaniac African (or Russian, or Prohibition Mafias), and petty thieves in supermarkets.

What Freakonomics adds to what we know about self-interested actions, for good or ill, I am not qualified to comment, but on the piracy phenomenon, I am not impressed.

Morality and Economics

Lee Randolph writes the Debunking Christianity Blog HERE:

“MORALITY IS ANALOGOUS TO ECONOMICS"

'From what I can see, "morality" is a category of behaviors that result from the self-interest of many agents. It is a form of self-organization of these agents according to their mental capabilities into groups behaving according to implicit rules that will become explicit in humans and has an analogy in economics. Its like circumstances are being guided by an "Invisible Hand". "The Invisible hand" is "an economic principle, first postulated by Adam Smith, holding that the greatest benefit to a society is brought about by individuals acting freely in a competitive marketplace in the pursuit of their own self-interest."
The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Answers.com 04 Mar. 2009. http://www.answers.com/topic/invisible-hand)

The difference between Self-interest and Selfishness
I see a lot of people make the claim that Adam Smith was endorsing "selfishness". Selfish is to Self-interest as Revenge is to Justice. While similar in concept, one is harmful and the other is not. Selfish and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.”

Comment
I have no comment on the author’s ‘de-bunking Christianity’ mission.

Mankind has always lived in societies, as our primate ‘cousins’ did and do. Smith’s Moral Sentiments is about the social basis of morality, the primitive origins of which pre-dates Christianity by hundreds of thousands of years, and is older than the earliest beliefs of the earliest religions. While bones fossilise, beliefs don’t.

Early Hominines (the hominids) were born into groups – they didn’t ‘form’ into groups (as far as we can surmise). The speciation from the Common Ancestor 4-6 million years ago (itself a social animal) was from an existing group of primates, some individuals of which speciated separately into chimpanzees, which also live in groups. What changed for the hominine species was the continuation of development manifested in bipedal postures and walking, growing brain-size and development, intense sociability, and changes in the social arrangements for reproduction to accommodate biological changes.

Given that economic aspects of social life pre-dated commercial society I am not clear how analogous moral behaviours are to economics. Lee Randolph cites a statement in The American Heritage® Dictionary of the English Language (see link above), which on this evidence is likely to be unreliable: "The Invisible hand" is "an economic principle, first postulated by Adam Smith”.

Readers will know that The Metaphor was not an ‘economic principle’ that was ‘postulated' by Adam Smith. It has become an ‘economic principle’ and was ‘postulated’ by modern economists since the 1950s, and has nothing at all to do with Adam Smith, nor any of the many other 18th -century authors who used the same metaphor in their literary works.

However, I think Lee Randolph is quite right when the identifies the differences between selfishness and self interest when he writes: ‘Selfish[ness] and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.’

Hollywood 'John Nash' Was Wrong

Hwee Ling writes a most interesting Blog, The Learning Economist (HERE):

“Is Economics a "Science"?

The scientific approach involves the 4 following steps:
1. Observation
2. Reasoning
3. Formulation of Theory
4. Testing
In the movie "A Beautiful Mind", you can see part of this scientific approach in use: The scene is set in a bar in which John Nash (played by Russell Crowe) rebutted Adam Smith's idea that, 'the best result comes from everyone in the group doing what's best for himself'. Adam Smith had said: "In competition, individual ambition serves the common good."

But John Nash took an opposing view.

In the movie, he observed what was going on in the bar, in which it was clear that all his friends had the same idea.. to go straight for a pretty blond girl who had just walked into the place with her other pretty (but not quite as pretty) friends. He related to his friends how they could all score if they all didn't go for the blonde but for her friends instead... He told them that, 'the best result will come where everyone in the group does what is best for himself ... and the group.' He envisioned a scenario -- a bargaining strategy -- in which nobody loses.. Watch how the idea (which was later developed into a theory) was conceived after he carefully observed the scene...

In case you missed the dialogue, here's the transcript:

Nash : Adam Smith needs revision.

Hansen : What are you talking about?

Nash : If we all go for the blonde...we block each other. Not a single one of us is gonna get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. Well, what if no one goes for the blonde?
We don't get in each other's way, and we don't insult the other girls.
That's the only way we win.
(Laughs)
Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? That's what he said, right?

Others : Right.

Nash : Incomplete.
Incomplete, okay?
Because the best result will come...from everyone in the group doing what's best for himself...and the group.

Hansen : Nash, if this is some way for you to get the blonde on your own, you can go to hell.

Nash: Governing dynamics gentlemen. Governing dynamics. Adam Smith...was wrong.”

Nash leaves the bar.

Comment
I have commented several times on Lost Legacy on this scenario from the film, Beautiful Mind, and the above words written by Hollywood script writers, whose authority for attributing ideas to Adam Smith is an unknown variable, though it is unlikely to be accurate if influenced by the existing consensus of US academe with its, frankly, appalling record of misunderstanding, misattribution, and mistaken presentation in many matters relating to the philosophy and political economy of Adam Smith.

I have no objections whatsoever if the above scenario is presented as a strategic Prisoner’s Dilemma problem using a casual dating game as its subject, which, plausibly, is replicated in bars and clubs across the land. My objection is to the imagined scenario being associated with Adam Smith’s assertions about individual self-interest and group behaviour.

The lesson of the Prisoner’s Dilemma, either in its original form of a ‘red-black’ [NB. The convention later became a red-blue choice] 100-round game, or as the well-known choices of confessing or not confessing offered separately to two prisoner’s suspected of a major crime, is that acting for what is best for self (confess to go free – as long as the other prisoner does not confess) or acting for what is best for both of them (both of them not confessing), is that always acting for self, or always playing red, leads to long jail sentences or high negative scores, whereas doing what is best for both of them (both don’t confess; both play black), as long as they both choose leads to short sentences and high positive scores.

This was precisely what Adam Smith recommended through the venerable and ancient ‘propensity to ‘truck, barter, and exchange’, or bargaining: ‘give that which I want, and you shall have this which you want’.

To settle a bargain, the players should consider that which is best for both of them; competing in a bargain to get the best deal for self, generally means that they don’t get a deal; they deadlock, fail to agree, and go their separate ways in disappointment.

In the bar scene, all the boys have the same choice; pick separate ‘targets’ and go for their favoured girl. (Unsaid, of course, the girls had the same choice of picking one boy; the male script writers typicaly took a chauvinistic view of the scenario.) As everybody is a stranger, it doesn’t really matter which you pick; you’re not making a life-time choice!

The real lesson of Prisoner Dilemma games is quite interesting (I have used them thousands of times in Business School negotiating courses since the 1970s) is that in the overwhelming majority of cases (92 per cent, when I used to keep scores for analysis) the outcomes were sub-optimal, that is negative red-blue scores, translating in Prisoner’s Dilemma games to maximum long jail sentences. Only 8 per cent of pairs scored maximum blue points (48 each).

Other researchers (John Carlyle, for instance) reported slightly better results of 87 per cent and 17 per cent respectively, but while I can be sure that my pre-game briefings were the same each time, and no hints were given by me, it may be that John’s pre-briefing of the game was not devoid of ‘hints’, which would account for the slightly different outcomes.

In short, Adam Smith was correct. People who act without addressing the self-interests of the other party do much worse than those who do (See WN I.iii.2: p 26-7).

It may be that John Nash understood the better outcome of the co-operative choice as well as Adam Smith did - people bargaining are not competitors; they are co-operators; they do best for themselves by serving the interests of the other guy – or gal – too.

Bargaining exchanges that conclude successfully are co-operative outcomes; both do best by serving each other’s interests consistent with the best available outcome for themselves.

This propensity among humankind was of early vintage in the history and pre-history of humanity (see my Pre-History of Bargaining: a multi-disciplinary treatment, Part I’, downloadable from Lost Legacy’s Home Page). It’s in chapter 2 of Wealth Of Nations. The 'Beautiful Mind' scriptwriters are wrong about Adam Smith (John Nash may well have been innocent).

Incidentally, if only I had read Wealth Of Nations before I was 20:

when I was a teenager going to weekly dances (jiving, etc.,) I had a friend who demonstrated his dating technique, which was to dance with girls who were ‘wallflowers’, rather than ‘popular’ girls. He claimed he always got a ‘certain’ date that way, while most of us ended up walking home alone …

Congratulations to Hwee Ling for writing a most interesting Blog for students.

More on Foley's Folly

In a review Adam’s Fallacy by Duncan K. Foley (2006) on the Mediated Blog HERE: This comment caught my attention:

“The ‘fallacy’ as Foley describes it, is as follows: “Smith asserts the apparently self-contradictory notion that capitalism transforms selfishness into its opposite: regard and service for others.”

To which I posted this comment:

Adam Smith did not confuse self-interest with selfishness. He was a moral philosopher and not one given to sloppy thinking; his criticism of selfishness as a behaviour is set out in his book, The Theory of Moral Sentiments (1759), particularly his specific critique of the ‘licentious’ views of Bernard Mandeville (‘Private Vice, Public Virtue’, 1724), which many modern commentators confuse with Adam Smith’s.

In Wealth Of Nations, 1776, he explains that self interest in a commercial economy (he never used the word ‘capitalism’ – it was not invented in English until 1854) where everybody is dependent on the services of thousands of others for their ‘necessities, conveniences, and amusements of life’, requires them not to think only of their own self interest, but to address the self interest of others, i.e., to be ‘other’ not ‘self’, centred by mediating their mutual self interests.

Unless they do this they may go hungry – there not being enough resources to make relying on benevolence, or stealing, reliable behaviours for everyday civilised life.

Thus, people receive the means for their dinner, and much else besides, by offering others their daily bargains:

“He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. 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; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’ (Wealth Of Nations, II.ii.2: p 26).

For this fundamental misunderstanding of Adam Smith by Duncan Foley, a distinguished historian of economics (I have heard him lecture), I described his 2006 book in a review as ‘Foley’s Folly’.

Self Interest and Selfishness

Simon Caulkin, management editor, writes in The Observer (UK), 16 November, HERE:

“Guess what? Self-interest is bad for the economy”

“Self-interest as the driver that, like an invisible hand, permits individuals acting on their own behalf to benefit society as a whole goes back to Adam Smith. But Smith at least realised the drastic inequities it would cause and proposed measures, including progressive taxes, to mitigate the worst effects. No such caution has been in evidence since the 1960s as the concept has become the central belief around which all Anglo-American corporate governance, and thence management as a whole, revolves.

“Not so in economics, whose central tenets - rational agents, the invisible hand, efficient markets - derive from economic work done in the 1950s and 1960s, 'which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused on the short term and blind in the long term, and errors get multiplied, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets' - for which classical economics has no framework of understanding.

“It's an error to think that management, or even economics, can ever be a 'hard' science, not least because of their self-fulfilling premises. That doesn't mean they are unworthy of study and understanding. On the contrary. But, as Greenspan sorrowfully acknowledges, the first step on that path is to bow to empirical observation and stop trying to prove the Earth is the centre of the universe.

Comment
Simon Caulkin confuses self interest universally benefiting everyone unintentionally, as an idea of Adam Smith’s (he asserts that the idea ‘goes back’ to him), when in fact Smith gave an instance of this happening when merchants preferred to invest their capital locally rather than send it abroad (Wealth Of Nations IV.ii.9: p456).

He also said this happened in many other instances, but he did not say this was a universal consequence of all individuals pursuing their self interest, ‘enlightened’ or otherwise.

Smith had a fine sense of history and he knew the difference between self interest and selfishness. In fact, he gives over 70 other instances in the Books I, II, and III of Wealth Of Nations where individuals exercising their the self interest had consequences that were anything but beneficial to society as a whole.

The merchants above were activated by their risk avoidance; they didn’t need an invisible hand to lead them to avert avoid adding to their risks. Smith used the metaphor as a literary device, not as an instrument of social behaviour.

The belief that there were invisible hands ensuring that thereby anything done by corporate bodies benefits society was “more like propaganda against communism than plausible science” is half right, though ‘communism’ was not the target; it was more positive than that. It was propaganda, alright, but not just by corporate-minded economists in favour of their clients being given a free hand to do whatever they wanted; it was also, and mainly, an attempt by mainstream economists to legitimise their mathematical models of general equilibrium.

From Misunderstanding Comes Forth an Opportunity

It is inevitable that the excellent work of Muhammad Yunis and the Grameen bank would excite welcome comments around the world. It is also inevitable that misunderstanding of Smith's positive views on self-interest as an important driver of behaviour would be displayed in some of those comments.

The positive effect of exhibitions of Chicago's misunderstanding is that it creates the (unintended) opportunity for corrections to be made as part of your Christian, Mithras, or Pagan (strike to suit) holiday reading.

From the Jamaica Gleaner (est. 1834) (24 December) I read:

‘Touching the poorest of the poor’ by Cedric Wilson,

“In establishing the Grameen Bank, [Muhammad] Yunus was acting in contradiction to one of the fundamental principles of neo-classical economics: It is in the pursuit of self-interest that the whole society is better off and not through acts of altruism.

Adam Smith, the father of modern economics, in describing the virtues of the market had this to say: "Every individual endeavours to employ his capital so that its produce may be of the greatest value ... And is led by an invisible hand to promote an end which is not a part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it."

Therefore, as an economist, Yunus would have known from the outset that Grameen Bank was a "bad idea". The objective of the Grameen Bank was not profit maximisation but something more elusive, more dubious: sustainability.
Beyond that, Yunus' banking operations were structured along lines that are seemingly counterintuitive - to put it mildly.

In a dominantly Moslem country, the bank accorded higher priority in lending hierarchy. Loans were given to people without collateral, and there was no provision for the use of legal means to recover loans in the event of a default.
On the surface, all of that seems like a recipe for disaster and perhaps conventional wisdom would suggest that he was simply just leaning against the wind. However, he saw good where others saw only ill; he believed that trust was more powerful than suspicion.

Today, the bank enjoys a 99 per cent repayment rate and currently has six million customers. Thousands of people's lives have been made better because they were able to access credit to start a chicken farm or purchase material to weave baskets, or some other endeavour that allows them to add value.”

Comment
Smith in the extract from the quoted passage was not ‘describing the virtues of the market’. He wasn’t discussing markets at all.

He was discussing the unintended consequences on individual motivation when faced with the differential risks of either exporting his scarce capital abroad to import foreign goods and to engage in the ‘carrying trade’ (shipping), or to invest it locally in home based activities where he could keep an eye on the venture and deal with people he knew, under laws with which he was familiar.

The consequence of his and fellow merchants’ risk aversion was that the national revenue was larger than it would be if merchants dispersed their investments across the world. In short, the national wealth (the production of ‘the necessaries, conveniences, and amusements’ of life) was the sum of its separate parts – if the parts are larger because of individual risk aversion, the sum would be larger.

Therefore, whatever neoclassical economics purports to assert, it does not follow that Adam Smith asserted in that passage that ‘it is in the pursuit of self-interest that the whole society is better off and not through acts of altruism.’ That latter argument is a different one and the distinction is important to understanding Smith’s political economy.

The unconstrained pursuit of self-interest, which in its wilder expressions, from the ‘anything goes’ school of corporate misbehaviours, it is reduced to ‘red in tooth and claw’ competition, which is about as far from Adam Smith’s moral philosophy and political economy as you can get, was not endorsed by Smith in this manner.

Self-interest promotes many different behaviours, including that of criminality (fraud, cheating, piracy, and theft), imposed externalities such as pollution, and legalised protectionism, monopolies, anti-competitive regulations, restrictive practices, slavery, forced selling, and ‘company towns’.

Self-interest can also promote the widespread mediation of competing interests through ‘truck, bartering and exchange’ propensities and the division of labour, where each party gains, not necessarily ‘equally’ from the outcomes. It was in this last form that mediated self-interest was ‘better’ (from being more reliable) than ‘benevolence’ (his famous allusion to the ‘butcher, the brewer and the baker’).

Muhammad Yunis and the Grameen bank did not ‘therefore’ act in defiance or contradiction of Adam Smith’s political economy (he may have acted in contradiction of the neoclassical economics, but then the whole of reality does that, if only its High Priests and true believers would look outside their cloistered windows and see how the world works).

‘Loans were given to people without collateral’; not quite true, if by collateral is meant secure physical assets usually preferred by bankers. The people borrowed as a group of individuals pledging to each other to repay what they borrow, and the power of those obligations made to people they know and live close to is regarded as sufficient to cover the small risk that any one of them will defect.

An acquaintance with the imperatives of ‘Prisoners Dilemma’ would assist in understanding how this minimises risks sufficient to calm the anxieties of the bank. Each person can choose to defect (‘do what is best for self’) or to co-operate (‘do what is best for all’). It comes down to trust and its necessary counterpart, risk (you can’t have one without the other). In PD, the prisoner defects because he can’t trust the other one not to do so – ‘I defect not because I want to, but because I must’. Some few defect because that is in their nature (‘I defect not because I must, but because I want to’).

Grameen found that the close social pressure of the women in each small group was sufficient, about ninety-nine times out of one hundred, for them not to defect. They borrowed the small sums and paid them back on time. They overcame the temptations of the negative aspects of the range of behaviours from self-interest, with the help of the trust exhibited by like minded neighbours.
This is exactly what Adam Smith would have expected – the impartial spectator (from whom they know what would eb wrong behaviour) and their unimpartial neighbours (who won't let them get away with defection without social costs)combine to lead to approved self-interested behaviours that benefited them and their neighbours, and, unintentionally, contribute to social harmony.

Cedric Wilson is on the right lines, but he may have done a small disservice to Smith’s legacy (though not Chicago’s version of it).