More Welcome Ideas from Australia

Nicholas Gruen, CEO of Lateral Economics and Chairman of Peach Discount Mortgage Broking, contributes a welcome piece on the lively “ON LINE Opinion” e-journal in Australia, entitled “Group and self-interests coincide” (30 June 2005: www.onlineopinion.co.au).

His basic argument (supported by examples from “Micro-credit” and the Gameen Bank and by “Linux” software and “Copyleft”) is that within social and economic systems there is always a mix of “self-interest” and the “community – where people look out for each other. He says that “dotted throughout our market system – which encourages people to pursue their own self interest –are systems in which groups pursue group interests”.

He states boldly and correctly:

“So long as people can behave collectively in the right context – within firms, within families and in administering the rule of law, as Adam Smith argued centuries ago, self interest and community interests coalesce in a miraculous way. Smith is famous for saying in the Wealth of Nations that in securing our dinner “We address ourselves” not to the humanity of the butcher and the baker “but to their self-love”.

And he adds:

“But in is less well-known book, The Theory of Moral Sentiments, [he] explored the importance of sentimental attachments, of people to one another, within families, and communities and nations. That was the great backdrop in which the market’s miraculous “invisible hand” could work.”

Now, it is not a quibble to question two aspects of Nicholas Gruen’s otherwise most encouraging theme, though I risk accusations of doing so. It is important to get the points right that Nicholas Gruen makes, particular as accurate statements of Smith’s views strengthens the points Gruen makes.

First, ignore the hyperbole of the use of “miraculous”. Look at the wording of Smith’s famous statement about getting our dinners from the “Butcher, the Brewer and the Baker” (for some reason it is becoming commonplace for people quoting Smith here to drop his reference to the “Brewer”).

As explained in my “Adam Smith’s Lost Legacy” (ISBN 1-44039-4789-9: Chapters 22-25), this has become the “fundamental error” among modern economists (e.g., Paul Samuelson and George Stigler), who misread Smith’s statement into him saying that markets are driven by self-interest when in fact they are driven by its mediation, even its neutralisation or suspension).

Briefly, we must not forget that Smith’s markets were driven by “truck, barter and trade”. We call it negotiation, today. There are two parties to every attempted and successful market transaction. The focus is on the sellers’ “self-love” not our own self-interests. In Smith’s even lesser known “Lectures in Jurisprudence” (Liberty Press/Oxford University Press) we see one of several of his earlier presentations of the famous paragraph, all along the same lines. Smith says:

“Many continually standing in need of the assistance of others, must fall upon some means to procure their help. This he does not merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere self-love is not sufficient for it, till he applies it in some way to your self-love. A bargain does this in the easiest manner. When you apply to a brewer or butcher for beer of for beef you do not explain to him how much you stand in need of these, but how much it would be in [his] interest to allow you to have them for a certain price.” [Lectures in Jurisprudence, 1763, LJ(A) v.45, OUP 1978]

Read that paragraph carefully for it states the important principle of trade: you serve your own self-interests best by serving the self-interests of the other party to the trade. Just as you suppress the urge to elaborate on your self-interest at the moment of the traded exchange, the other party suppresses his self-interest to serve yours: you hand over the agreed price and he hands over your dinner. Both of you serve your their self-interest by serving the other’s self-interest. It is not self-interest for self that makes peaceful trade possible, but only by addressing the self-interest of the other. “Mere self-love is not sufficient”!

This is the correct understanding of what Smith taught in his classrooms from 1751-64 and of what he wrote in “Wealth of Nations” in 1776.

It is also necessary to correct the modern use of the “invisible hand” for the working of markets (a mainly US corruption of Smith’s scarce use of the metaphor).

Smith mentioned the “invisible hand” three times only in his Works.

First in his “History of Astronomy” (written between 1743-51 but not published until 1793, three years after he died) where he refers in a sarcastic comment about pagan superstition to the “invisible hand of Jupiter”, the Roman God not the planet; second in “Moral Sentiments” (1759, pp.184-5) in a comment on the Feudal Lords spending the surpluses from their estates on their Retainers and poor labourers in nearly the same distribution as would occur if the retainers and poor owned little plots themselves (note there were no markets involved); and on the third and last occasion in “Wealth of Nations”, Book IV, p. 456) when describing the preference of local “merchants and manufacturers” to employ their capital in support of the domestic industry rather than abroad in foreign industry. Again this is not about how ‘markets’ operate but about the proclivities of people to prefer having their capital close at hand to where they live. The unintended consequence was for domestic industry to grow faster than it would grow if they preferred to export their capital and grow industries abroad. Again this is not about how markets operate but about how human intentions have unintentional consequences, a wholly different meaning.

Hence, Smith’s “invisible hand” was to do with the consequences of people’s preferences and prejudices and not with “miraculous markets”. The two should be disconnected. There is plenty of evidence that Smith was also (but more so) suspicious of the consequences of the proclivities of “merchants and manufacturers” for pursuing their self-love against the interests of consumers by restricting supplies, forming monopolies and raising prices. No “invisible hand” protects consumers from these depredations in markets!

It might also be worth noting that the metaphor of the “invisible hand” belongs not to Smith but to Shakespeare (who else?) in Macbeth: “thy bloody and invisible hand”.

How does this help Nicholas Gruen? Quite a lot.

Smith did see a connection between the moral sentiments of humans that added to and maintained social cohesion stability and the cohesion of peaceful “markets”, which in the same manner that the Impartial Spectator procedure reduced individual hostility down to what the Impartial Spectator could “go along with” (i.e., a force for the moderation of the passions), the propensity to “truck, barter and exchange” reduces the very real temptations to acquire other people’s goods and services by theft, coercion and violence.

Combined together, these peaceful and moral propensities, under the rule of law and without undue interference, were sufficient for a society in the Age of Commerce (“at last”) to grow gradually from poverty to general opulence for all.

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Dr Graham Scott Speech to ACT Tamaki Midwinter Dinner; Monday, 27 June 2005; 7pm. (as reported in www.scoop.co.nz)
Dr Graham Scott, former Secretary of the New Zealand Treasury, 1986-93, spoke at an event run by the ACT, a liberalist political party in New Zealand, and made some highly interesting statements about his and ACTS’ philosophy and political economy.

Those familiar with the ideas of Adam Smith will recognise from where Dr Scott is coming. I give an edited sample below, part direct quotes and part paraphrases, from his speech as reported by “Scoop Independent News” (www.scoop.co.nz) and I strongly recommend you to visit “Scoop” and read his remarkable speech in full.

First, he sets out his own philosophical stance: “Throughout my career I have found myself at the liberal end of the spectrum of economic thought with the occasional excursion into other approaches.”

Specifically, he said: “I have been influenced by philosophical liberalism beyond just economics. By this I mean the philosophy whose roots are in the Scottish Enlightenment – Adam Smith, Locke, Hume, Hutcheson and the Englishmen who followed them, and also the Scots and others who influenced the design of the radically new institutions of government in the US after the revolution. If you want to read one book about these people, read “How the Scots Invented the Modern World” by Arthur Herman.”

Naturally, I suggest you read for yourself Smith’s “Wealth of Nations” and his “Moral Sentiments” (check Amazon’s economy prices for the “Liberty Fund” definitive editions from “Oxford University Press”). If not already aware of it, read my "Adam Smith's Lost Legacy" and appreciate Dr Scott's views in context.

Scott talks sense borne of his great experience of being at the heart of government and makes the valid point that “real life government” is not about “my favourite eighteenth century philosopher [being] better than yours.” Government is about finding a way to make it work to advance national welfare and is often compromised by people wanting government to do too much through its undoubted coercive powers.

“Liberals, he says, “take a more modest and sceptical view and worry that certain expansions of the realm of the state are as likely to service the special interest as the public interest and that the dead weight of the state can undermine prosperity.”

Scott’s experience has produced a scepticism about the ability of governments to be able to fix everything that goes wrong. ‘Governments just cannot correct all the market failures that arise. As another economist once said of government’s attempts to correct all the market failures, “just because a fish cannot fly does not mean a rhinoceros can do better”.’ Governments should do less ambitious and do what they have to do to a high standard of excellence.

Instead of administering all things from the centre, governments should build up rational and effective management systems in the public sector “to support efficient and decentralised management” or “let private markets seek out better solutions in some areas; or even partner with the private sector productively.”

Smith expressed the same doubts about governments in his day and also about private commissioners. He did not come down on one side of the other, as can be seen in Book V of “Wealth of Nations”. He left it open which form of management to use in the daily operations of publicly funded projects, clearly preferring utility to dogma.

Of Scott’s ambitions for the ACT in the coming years, he ses them as a conscience of the public trust in the spending of their taxation funds:

“I would like ACT’s liberal vision, principles, values and policies to be there always, to resist ambitious politicians with self important pronouncements about their ‘leadership’ and grandiloquent visions of social engineering or nation-building either from the right or the left. I would like there to be in Parliament a party always to resist the proposition that when we have a problem then the ‘gummint’ must take charge; to resist excessive taxation and the nationalisation of commercial businesses, the exclusion of the private sector from the provision of public services and threats to the security of private property.”

I think most readers of Adam Smith would agree with that.

Dr Scott also adds a personal note with which most of use should concur:

“I would like there to be in the Parliament a party to stand against racism whenever it raises its ugly head; to welcome migrants as fellow Kiwis and to keep the instruments of government open, simple, transparent, available to all regardless of their connections and free from bias. I would like there to be in the Parliament a party always to respect the diversity of all New Zealanders as our faces change.”

New Zealand is a recent immigrant country, but then most countries in the world were immigrant founded too. Some have been around for millennia and experienced waves of new immigration long ago, and they tend to forget sometimes that their ancestors found their welcomes from the existing descendants of earlier migrations somewhat less than warm or friendly.

Read the original speech in full: www.scoop.co.nz (with thanks to Scoop for making Dr Scott's speech widely available).

Negotiating the application of non-negotiable principles

The Free Lance Star carries an article (unsigned) on the political conflict over the CAFTA Free Trade treaty winding its way through the US legislature. The issue is that of sugar and the author takes a pessimistic view of the likely outcome of a Senate vote. The author writes in sympathy with Adam Smith on free trade. My response makes some additioonal points about what Smith actuall proposed:

You are absolutely correct in your analysis of the complications caused by making selective exceptions to a free trade measure and your ‘suspicion’ that Adam Smith would agree with you on principle.

Looking beyond the pure analytics of economics we must take account of the political economy of promoting freer and free trade. Adam Smith was not one given to dogma and certainly understood the absolute need for change in principle and the relative need to go about instituting change with due allowance for political and practical realities.

For example, in Book IV of “Wealth of Nations”, which contains his scathing critique of the “Mercantile System”, he had this to say about the withdrawal of protection from cheaper priced goods produced more efficiently abroad than at home:

“The case in which it may sometimes be a matter of deliberation, how far, or in what manner it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufacturers, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case, require that the freedom of trade should be restored only by slow gradations, and with a great deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable.” (WN, IV.ii.40: 468-9)

If US produced sugar is twice the world average in price this suggests a heavy dependence of land, labour and capital concentrated on US sugar production, with consequent severe disruptions to all those involved in its production, should half price sugar pour into the US in short order. Smithian Political Economy advises “a great deal of reserve and circumspection” should be applied to the transition period from when the free importation policy is announced (the principle) and when it comes into full effect.

There can be no compromise on the principle of free trade (its absence costs consumers in higher prices and it diminishes economic prosperity by the amounts of land, labour and capital tied up producing something at twice the price of foreign producers). By releasing these economic resources over time to the rest of the economy, and by diverting spending on expensive to cheaper sugar, more resources are released to the economy to purchase other goods and services, and, not to be forgotten, foreign producers of sugar from increased sales of their products to the US can now afford to buy more goods and services from the US. Overtime, both parties to free trade make real gains.

But to achieve these gains, we must also mitigate the losses in the transition period. That is Adam Smith’s true message about instigating freer and free trade.

Charles Stein is right - almost

Charles Stein, a columnist for The Boston Globe, Boston, Mass. USA, wrote an interesting piece today, called: “For oil suppliers, politics often subverts markets.”

In it he says: “In the 18th century, Adam Smith understood that when the price of a commodity rises, people will produce more of it until the price eventually comes down. Smith's observation had held true for oil. When oil prices soared in the early 1980s, countries from Mexico to Norway found and pumped more oil, which contributed to a collapse of prices a few years later.”

Compared to then the situation today seems to be different. “In a long list of countries”, he notes, “politics trumps economics and markets aren't being allowed to work.” And his article details the apparent failure of oil producers, among them Venezuela, Mexico, Russia and Indonesia, to respond to higher oil prices by boosting output, increasing investment and improving efficiency. In place of this expected economic activity Charles Stein sees the mucky hands of politics, graft and inefficiency.

He concludes: “I would be more confident about those new supplies if more countries played by the rules of the market. The energy world needs more investment and that will happen only if people with money believe they will be treated fairly and squarely. That may not be politically correct. But it is true.”

And he ends with a plaintive plea: “Where is Adam Smith when we need him?”

First, let us be clear that Charles Stein correctly states from Adam Smith’s legacy. But in his statement perhaps he has missed the importance of the words: “people will produce more of it until the price eventually comes down”. In short, markets are not given to responses that take effect at infinite velocity. There are lags – they give content to the word “eventually”.

Another, less obvious point, is that markets are composed of people and different people read their situations differently. Adam Smith certainly understood this. He showed no illusions about the complicity of “merchants and manufacturers” in their subversion of the markets they operated within. For remember, markets are the summation of the decisions of disparate people, most of whom act independently of each other. Smith noted how “merchants and manufacturers” were given to act against the competitive tendencies of markets by trying to form monopoly practices, including that of curtailing supply so they could reap higher profits in conditions of rising demand.

In the current oil situation, with rising demand and rising prices it is perfectly consistent with Smith’s “Wealth of Nations” for some major players (Venezuela, Mexico, Russia and Indonesia, for instance) in control of oil production to see an opportunity to reap extra profits by allowing supply not to increase quickly. That way tax income rises too. The fact that for various reasons these countries are run by politicians too, who are not inclined to allow market forces to operate, only adds to the normal proclivity of some entrepreneurs to act as Smith predicted they would: sit on their hands and let demand continue to drive up profits from rising prices.

None of this contradicts Adam Smith’s prediction of the tendency of the market to add to supply when demand exceeds current capacity, eventually. There are other suppliers contemplating the same excess demand situation; there is an inevitable lag in new investment taking effect (after finding a ‘safe’ place to invest it) and new exploration to search for and prove new sources of oil, hitherto beyond past price points.

Users of oil also contribute on the demand side because they have every incentive to economise on its use – we can expect this process to work fairly quickly, or at least quicker than for supply to rise. Also, producers will eventually succumb to the reality that their short term restrictions cost them what they could sell if they had more oil available. If they think they can do this before others react too, they can increase volume profits. Of course, when others see themselves losing out they too will increase supply.

So “where is Adam Smith when we need him”? Right where is has long been – in “Wealth of Nations”, the whole book and not just a few isolated quotations from him.

But, let us thank Charles Stein for correctly applying Smith’s legacy to a modern problem. I hope the above helps clarify some of the issues raised by his article.

(Charles Stein is a Globe columnist. He can be reached at stein@globe.com)

Strange but welcome support for accuracy about Adam Smith

Here is something unusual. A reference to Adam Smith by a speaker at a conference that is absolutely correct. I got it from a Blog witten by Suw Charman, who is reporting on contributions at some kind of conference of people speaking about something way over my head. Seems to be about programming or modern communications equipment, or may be something else entirely.

You can get a flavour on www.corante.com/strange The piece below reorts what John Clippinger said:

"Adam Smith - two sides. Unless you have sense of empathy or sympathy and moral responsibility you can't have the self-interest side either. [Absolutely correct]

"These good acts give pleasure, but how it happens that they give us pleasure? Because nature hath implanted in our breasts a love of others, a sense of duty to them, a moral instinct. In short, which prompts us irresistibly to feel and succor their distresses." -- Thomas Jefferson, 1814 ["Implanted in our breasts": Straight out of "Moral Sentiments" showing that Jefferson had read it]

Humans are wired for trust: [The rest is from Evolutionary Psychology; probably correect too]

Human brain evolved in part to read an dmanage complex social relationships. Behaviorual and neuro-economiosts found that people are not rational, maximising economic actors but risk trust to protect reputation and social norms. Economic "chioices" are not conscious - but a mid-brain function.

What is trust? - evolutionary stable strategy tested through a variety of social species over millions of years of evolution. - a pattern of neural pathways and dopamine circuits - embodied in the social emotions - mirror neurons. - socially constructed and enforced 'protocols' that depend upon 'honest signallying', credible and equitable reputation accounting and outcomes, cheater-detection and enforcement.

Trust is more emotional than rational - you can't make a distinction between rational thinking and emotional thinking.

Reputation and trust: - Control through 'reputation' rather than 'force' - How someone is seen and rate by their social peers determines their standing and access - Reputation scales faster and is less costly than force - Emergent network roles and dynamic specialistaion - Social identity an 'social exchange value' social currency is tired to context and reputation.
Network leadership roles - eight different people work in a network - exemplar, gatekeeper, visionary, truth-teller, fixed, connector, enforcer, facilitator.

Effective networks work well if these people are placed and operate effective.
{diagram of 'netwoork role-based sense-making inter-networks}

SocialPhysics Platform - multiple identities and contexts - 'you have many selves / different ways in which you perform in different networks'.

To find out more email suw: suw.charman@gmail.com or Google her

Competition expands markets

The Australian Federal Treasurer, Peter Costello, correctly used one of Adam Smith's statements to great effect last week, as reported by Katherine Murphy in The Australian.

He was talking about the activities of lobbyists around the Australian parliament building:

"Adam Smith famously said in The Wealth of Nations people of the same trade seldom meet together even for merriment and diversion, but rhe conversation ends in a conspiracy against the public or in some contrivance to raise prices" and in consequence Costello said: "Everytime I see a lobbyst walking the hall of Parliament House I think of that quote".

Excellent advice.

The particular issue exercising the Treasurer's mind is the future of QANTAS, the airline. The issue has divided the Government and its backbench members. Some want to revert to the traditional Australian preference for protection (so does QANTAS). Others prefer competition.

Those who favour protectionist controls, quotas and regulation believe in the fallacy that demand for a product or service is a fixed pie and that competition will mean fewer pickings for each airline. So, if Singapore Airlines is allowed to compete with QANTAS on the Australia-US route then inevitably QANTAS will be the loser.

Those in favour of competition believe that new traffic will be generated by new forms of service, competitive pricing and customer oriented services. State protected monopolies have no incentives to focus on customers, but every incentive to focus on themselves as producers. This is so well established it barely requires additional evidence.

What the Australia USA route needs is more competition, not the dreadful duopoly of two airlines. Katherine Murphy mentions that Virgin is interested in the same route. Now that really would be something. Having flown all three airlines, my money would be on Virgin driving up standards. (it would certainly match the high qualities of Singapore Airlines).

However, Australia is prone to throwing regulatory bodies into the way of change and competition. And it has a thing about "foreign ownership" too. I hope Peter Costello can take the "heat" that falls upon anyone opposing domestic monopolies and protectionists, a phenomenon also commented upon by Adam Smith.

In the case of MPs in Smith's day who opposed monopolies, he said:

"neither the most acknowledged probity, nor the highest rank, nor the greatest publick services can protect him from the most infamous abuse and distraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists." ("Wealth of Nations": Book IV.ii.43)

Good punchy reading

A Blog that makes powerful cases for good sense in globalisation issues is Alex Singleton's
www.globalizationinstitute.org/blog

I noted the following contribution on the subject of Mr Hinnrichs (see below for my comments) from a letter that he wrote to the The Herald (Glasgow) which carried the orginal constribution from Hinnrichs:

"And in The Herald, a Scottish daily newspaper, I have the following letter. It is in response to a letter attacking UK finance minister Gordon Brown and the Make Poverty History coalition:
Given that the chancellor has the power to make decisions that will help Africa, it is quite right that Make Poverty History is engaging constructively with him.

Alan Hinnrichs (Letters, June 20) opposes the chancellor's support of technical assistance for privatisation in Andhra Pradesh. Yet according to Andhra Pradesh's government, the savings caused by privatisating loss-making industries has led to the setting-up of 4400 primary health clinics, resettlement of 2200 houses for slums, implementation of a large water-supply scheme, building 11,000 new primary schools, building 7333km of roads, setting-up 44 new medical colleges and creating more than one million new jobs.

The suicide rate Mr Hinnrichs quotes has nothing to do with privatisation. The 4000 suicide figure (out of a population of 76 million) is cumulative over a number of years and spiked in two years where there was massive drought. Andhra Pradesh's suicide rate remains lower than the UK, Canada, the US, most of Europe, and Russia.

Finally, Mr Hinnrichs complains that Make Poverty History will not allow anti-war protesters to address the demo. Given that Iraq is not in Africa, I hardly think that Africa's poorest would be happy to hear that the demo had been hijacked by a side issue.

Alex Singleton, president, The Globalization Institute"

Now that is the kind of punchy communication that we need a lot more of in current debates. You should visit the Globalisation Institute Blog and sample the quality of the message.

One good idea leads to others...

An interesting application of Adam Smith's "absoute advantage" and David Ricardo's "comparative advantage" theories for the benefit of trading is presented in www.blackenterprise.com (Michigan, USA).

The authors apply this to the education of people. Instead of focussing on what people are weak in, they advocated using different strengths of teachers and coaches in a team effort rather than trying for teachers and coahes who are required to cover everything (some of which they themselves will be weaker in).

Nothing wrong with their approach - it's just novel, that's all.

Selective tax cut NO, Flat Tax YES

Graeme Philipson, in the AGE (Melbourne - one of Australia's prestigious newspapers) gives a classic example of how to slide into a protectionist measure while praising Adam Smith, free trade and globalisation.

He writes:

“I am a believer in free trade and globalisation. Adam Smith's law of the comparative economic advantage of nations is a self-evident truth. Anybody should be able to import anything they want, free from tariffs and other trade restrictions, because certain countries have advantages which they are right to exploit, which makes for cheaper goods and a higher standard of living for all.”

No quarrel with that clear and unambiguous exposition of free trade.

Then Graeme Philipson brings into play his classic “but” part:

“our ICT [Information, Computing Technology] trade deficit is higher than our total exports of iron ore, beef and wheat combined. Australia's overall trade deficit is at record levels, exceeding $25 billion last year. ICT makes up just about all of that and the proportion is increasing.”

He thinks this is shocking; it should be “front page news”. Since he admits that there is no point Australia competing with China, Malaysia, Japan, South Korea, Singapore and Taiwan (America is not a problem and neither is Europe) in cheaper IT hardware, it must export something it is better at than them. Sure enough there is something that Australia could be competitive in exporting:

“As Adam Smith would tell us, we should be exporting that which we can do better or cheaper than other countries. Our export of ICT services is the one bright spot in the picture.”

However, despite the endorsement of the use of Adam Smith’s name, there is a major problem.

“Local ICT companies, pay higher rates of tax than their multinational competitors. The total tax rate in Australia has steadily increased. Taxes get higher, our companies become more uncompetitive, our deficit increases, we have to borrow more to pay our way.”

Now Graeme does not spell it out – the solution that we dare not name – but it is clearly a cut in company taxation of the ICT software companies that could raise exports by using Australia’s great reputation for “innovative software engineers and good project managers”.

He might even be suggesting a tax rebate for those that export their ICT services, perhaps the kind of “Bounties” that Adam Smith justly criticised in “Wealth of Nations”. But consider the implications of a slective tax cut for ICT service companies in Australia. Under WTO rules other countries would consider that a subsidy. And why not?

Graeme’s ritual genuflection for free trade, globalisation and Adam Smith’s comparative advantage becomes a purely protectionist measure, and a Mercantile one at that with roots going right back to the 17th and 18th centuries and beyond. It’s what Australians call a “bum steer”.

If he was to advocate a tax cut for all Australian companies - even better, a Flat Tax - he could continue to link Adam Smith's name to his proposals. This would be the appropriate solution. And given the general problem of high company taxation he mentions, it seems to be justifiable on its own grounds and not just for exporting ICT services.

[Graeme Philipson is on: graeme@philipson.info]

More Nonsense from the Extreme Left

An angry man, Alan Hinnrichs, from Dundee, Scotland, does not want Gordon Brown, MP, Chancellor of the Exchequer and future leader of the Labour Party, to speak at the Anti-Poverty March on 2nd June in Edinburgh.

He writes: “This single action almost renders the demo meaningless and loses it all credibility in my view.”

He objects to Brown marching in a crowd of 100,000 plus with him because he:

a) supported the Iraq war (obviously Hinnrichs opposed it … as did Saddam Hussein);

b) spent “£20m in public money to the extreme right-wing Adam Smith Institute” (a far fetched nonsensical ascription of “extreme right wing” applied when to the Adam Smith Institute – on this scale where would Hinnrich’s place the Nazis?).

c) “summarily sacked 104,000 low paid civil servants in this country” – yet the same Brown has added over 100,000 civil servants to the State payroll.

Hinnirchs adds that letting Brown speak at the demonstration is an:

“action [that] would be a betrayal of the poor of Africa who are in poverty because of Gordon Brown's polices. Demonstrations are where the people protest against the government and make their grievances known. They are not places for future prime ministers to grandstand.”

What absolute nonsense! Gordon Brown’s policies did not cause the “poor in Africa” to be in poverty. Much of that, if not all of it, is caused by the theft of the continent’s resources by homespun dictators, corrupt politicians and the imposition of lunatic economic policies (e.g., Zimbabwe) that have made a mess out of Africa.

I note that Hinnrichs says not a word of condemnation of the warlords, racists and thieves who have looted the continent, destroyed its economies and oppressed its peoples for more than thirty years (if the can stomach supporting the likes of Saddam Hussein, silence on Mugabe and his ilk is no doubt easy). Add to this the protectionist economic policies of the European Union
and we have a complete explanation of Africa’s poverty. And who is working to reverse the protectionism of the EU? Why Gordon Brown and Tony Blair!

The whole point of demonstrations is to influence those able to do something about what you are demonstrating for or against. Adam Smith understood this in his many efforts to influence British governments and Ministers in the late 18th century. And here is a Government Minister in the second highest office in the land marching with Alan Hinnrichs. I would think Hinnrichs would be better spending his time trying to have a quiet word with Gordon Brown to encourage him to do more.

Instead, Hinnrichs announces he is going to do something really silly. He says:

“If he does speak on July 2, I, for one, will make my feelings clear by booing him and turning my back.”

Thus speaks the voice of the extreme left in alliance with the worst examples of the truly extreme right. I would rather march with Gordon Brown.

A Marxist on the Invisible Hand

Encapsulated in the following extract from an article by Archie Kennedy (no relation) entitled “The Value of Workers”, are misunderstandings of the ways markets work and what they are about. There is also an underlying arrogant tone in people who assume that they know better than other people what is best for them, an all too familiar mantra heard by the victims of those who choose, usually by coercion, what is best for ‘society’. Archie Kennedy writes:

“Any notion that the invisible hand of supply and demand will produce what is best for society is simply wrong. For example, a given society may need more medicine or health care or housing, whatever the case may be. The market suggests however that producing Play Stations is more profitable. Play Stations will be produced in accordance with the laws of supply and demand. Capitalism is very good at producing trinkets, shiny toys, and killer hamburgers.”

The misuse of a metaphor from Shakespeare’s “Macbeth” (“… thy bloody and invisible hand”) and, over a century later, by Adam Smith in an isolated single mention in his “Wealth of Nations”, is instructive for it suggests a distant acquaintance with its meaning if Archie Kennedy believes he can ascribe the invisible hand metaphor to “supply and demand”, either in Adam Smith's theory or practice. He should read Smith’s only use of the metaphor in “Wealth of Nations” and discover that he was not referring to supply and demand at all.

The core of Mr Kennedy’s complaint about the market appears to be that “a given society needs more medicine or health care or housing” but gets instead “Play Stations” because they are “more profitable”. First, of course, Mr Kennedy’s judgement of what society needs more of is his personal opinion, to which he is entitled to express. It may be that a fair number of others would agree with him, given his selection of “medicines or health care or housing” as the alternatives to producing Play Stations. However, a selection of any other set of alternatives may be more controversial, though equally justified, in a free society under the rule of law (before Archie Kennedy utters a quibble he should give us the evidence for his experiences of his life under a real totalitarian regime rather than in Canada).

“A given society" may need more “drugs, playing cards and lap dancers” or “more hymnals, confessionals and statues of the saints” or “more copies of Das Kapital, Commissars and gulags”, depending on who’s running it. And that last is crucial.

The range of alternative combinations of sets of goods and services that “a given society” may “need” is almost limitless, each with possible constituencies of support, and all of them on an equal footing to Archie Kennedy’s, unless he has sufficient power to enforce his selection on the rest of us. In North America and most of Europe, he hasn’t that power. Because this is what it comes down to: Archie Kennedy has selected his preferences to decry a particular selection his rhetoric claims that “the market” has chosen, namely, “Play Stations, trinkets, shiny toys, and killer hamburgers”.

It might be helpful just here to gauge Mr Kennedy’s sense of proportionality by suggesting that if the production of Play Stations were to cease completely by the end of the week and the resources used in producing them were transferred to ‘medicine, health care and housing” it is doubtful if the net effect would be very large. Though if the reverse measures were imposed in Canada, US and western Europe, on medicine, health care and housing and their enormous expenditures were transferred to making Play Stations, the consequences would be awesome indeed; we would be awash with them and their price would be negative.

We are led this point (but NOT by “an invisible hand”!) to pose the question as to what kind of society would we need to bring about the appropriate balance between the production of Play Stations and the provision of Archie Kennedy’s preferences for more “medicine, health care and housing”? This is not a question about the desirability of either choice in Archie Kennedy’s counter-poised alternatives, though no doubt he would want us to listen to his case against Play Stations. In free societies we can choose to listen or not to listen to his views.


So what kind of society does he envisage as appropriate to satisfy his preferences? I am asking him to spell out how he would order affairs in such a way as to stop the design, production and marketing of many of the things that free consumers choose in market societies to buy, so that he can release their resources for the things that he thinks are better for them, assuming, of course, that his version of society could produce more medicine, health care and housing too. The seventy-two years of Soviet planning did not exactly deliver on its early rhetoric about ‘liberating the proletariat’. The Dictatorship of the Proletariat was just, well, a Dictatorship, and a shabby one at that. The orphanages of Romania were one example among many of the decrepit state of State provision for people not members of the Socialist Elite, i.e., income distribution mirrored that of capitalist societies but was worse because nobody could protest about it and change things by free elections.

Markets are better are providing people with what they want – not what they should want – and they do this quietly without gulags, peoples’ courts and the people impoverished by shortages of the basic necessities of life. A ‘market’ is the sum of the people’s choices at any given moment for the vast array of products and services on offer or potentially on offer . It is not something alien from outer space. There are no hands, visible or invisible, driving them.

If people want more medicine, health care or housing they accumulate the funds to get them, or if the State arranges their supply, funded by taxation, they vote for more in democratic elections (the least worst of all systems of government). In Marxist “planned” economies they get what they are given and do without what they can’t get. In practice, what they are “given” by the “planners” is insufficient medicine, health care and housing, and no Play Stations.

Not a qibble - just accuracy

“Economic Viewpoint: Lost Arab Banking Creativity”
Dar Al-Hayat , Saudi Arabia - 15/06/05

Mr. Al Anani, an economic expert, is the author of the article, “Economic Viewpoint: Lost Arab Banking Creativity” in Dar Al-Hayat. He writes on the need for Saudi banks to become more innovative in producing financial products rather than relying on imported ideas from western banks.

Among the statements he makes (in what is an interesting perspective on banking) is:

“Adam Smith said that the division of labor depends on the size of the market.”

Now while it is true Smith makes that statement in “Wealth of Nations”, he was not the originator of the concept of the relationship between the division of labour and the size of the market, though this has been continually attributed to him since the late 1th century, and now in the 21st century.

Some economists have gone further. They claim Smith was the first to identify the division of labour itself, despite it being written about by Plato in The Republic and Sir William Petty in 1683.

Adam Smith’s professor when he was an undergraduate student at the University of Glasgow, 1737-40, was Professor Francis Hutcheson. As was the normal practice in the Scottish Universities in the 18th century, Professor’s Hutcheson’s classes in Moral Philosophy included a large element in them of what we now call ‘political economy’. In the classes that Smith attended, Hutcheson included a section around the statement that the ‘division of labour is limited by the market’ (see: Hutcheson, “A System of Moral Philosophy”, 1755 – posthumous, published by his son).

These matters are not just pedantic quibbles.

Adam Smith is constantly quoted as the authority for lots of ideas he never had, while his real genius is hardly known because it is ignored. In the case of the division of labour and the market he is credited with something he did not discover (and never claimed to have done).

Both the views he never held (the usual false ascriptions about laissez faire, self interest, selfishness, and benevolence, etc., all discussed in “Adam Smith’s Lost Legacy” (Palgrave Macmillan, ISBN 1-4039-4789-9) and the discoveries he never made (division of labour limited by the market), blot out all the useful concepts he did originate, including his model of society in his ideas about the Impartial Spectator, Impartial Justice and the Impartial Market.

Adam Smith is a much more interesting philosopher for what he did write than popular knowledge about him suggests.

No contradictions between Smith's two Books

A central theme of Adam Smith's philosophy and economics in my book, "Adam Smith's Lost Legacy" (Palgrave Macmillan, March 2005) and also on my companion web site, www.adamsmithslostlegacy.com, is a criticsm of the alleged concentration of Smith on self interest in “Wealth of Nations”

Chapters 22-25 of “Lost Legacy” approach the ‘self love’/self-interest issue from a different perspective to most economists and others who claim they speak with the authority of people who have actually read his books right through and are not just relaying isolated quotations or what their lecturers told them.

Smithian markets are not based on unrestrained self-interest: what he said in fact is that people serve their self interests best by serving the interests of others. I too came at this conclusion from my work since 1972 as an educator of negotiators (and as a negotiation consultant) . It seemed to me that many commentators on Book 1, Chapter 2 of “Wealth of Nations” completely misread Smith on the ‘propensity in human nature … to truck, barter and exchange’.

I call it the 'fundamental error' in the exposition of what Smith was about. I also put this down to them not having studied or practised negotiation to any conscious extent. I will not rehearse all the arguments for this view here, but you may be sure that they endorse what is in “Wealth of Nations”.

Professor Otteson’s book, “Adam Smith’s Market Place of Life” (Cambridge University Press, 2002, ISBN 0-521-01656-8) , linking of a market place to the derivation of morals is absolutely brilliant. Only Hector MacPherson’s unpretentious little book, “Adam Smith” (1899) correctly stated Smith’s principle in ‘truck, barter and exchange’ before Professor Otteson.

In one small snippet (Chapter 24 of “Lost legacy”), I link the exchanges between the person and the impartial spectator (“Moral Sentiments” I.i.4.9-10) to the negotiation exchange and show the connection between the themes of his two books. I regard these three expositions as extremely encouraging for those who wish to restore Smith’s legacy to its proper status.

On a related point, some correspondents ask why Smith did not mention benevolence in “Wealth of Nations” (except in the famous quote about the ‘butcher, the brewer and the baker’) and the impartial spectator, when he mentions benevolence and the impartial spectator in “Jurisprudence”. Is this evidence supporting the allegation (the 19th century so-called ‘Das Adam Smith Problem’) that his two books are contradictory? Not at all!

Perhaps there is a simple reason for their omission. If we remember that “Jurisprudence” consists of verbatim notes of his live lectures compiled by anonymous students at the University of Glasgow in 1763-4, their inclusion may have been a teaching device to remind his young students of the themes in his lectures in “Moral Sentiments” that he was giving in the same students each week.

I am sure we have all done this when lecturing to overlapping groups of students – while speaking, analogies occur to us from things we have been talking about elsewhere or they have been reading (supposedly), or from things happening in the wider world – and verbatim notes would capture these ‘fillers’.

But when it came to writing “Wealth of Nations”, his likely audience had shifted from the closed environment of the University class to the wider world audience to whom such references would mean little and to stop and explain the connections he would have had to extend an already long book. I think judicious editing was at work here in “Wealth of Nations” written from his lectures, not from verbatim records.

Unfortunately, we do not have his written ms of what he intended to place in “Jurisprudence” to confirm that my supposition is correct that he dropped his extempore lecturing references. The "Jurisprudence" ms was burned on his instructions just before he died in 1790. The students’ notes surfaced again over a 100 years after he had died.

I believe this possoible explanation for his not linking the themes in the two books directly is credible and plausible, and those reading into the omissions a deeper meaning are probably misled to their conclusions

Another Contender for the Monthly Prize 4?

“Why Wright is so wrong, or the case for 'Free Love”

Cragg Hines
Copyright 2005 Houston Chronicle. Hines is a Houston Chronicle columnist based in Washington, D.C. (cragg.hines@chron.com)

“Dallas-Fort Worth at the expense of consumers and a free-market economy”.

Cragg Hines’ article is a classic example of an age old problem in business. A politician, keen to assist the then new airport at Dallas- Fort Worth, Texas persuaded the US Government to protect the commercial prospects for the airport by restricting an existing smaller and older airport in Dallas, Love Field, from flying just about anywhere where consumers might want to fly in 43 other US States. This became known as the Wright Amendment, after the Texan politician.

The case for protectionism (as always when it is first introduced) seemed justified 26 years ago if the investment was to pay its builders. But today, 26 years later, new protectionists oppose removing the now unnecessary protection.

Dallas-Fort Worth is no longer a fledgling ‘infant industry’. It is one of the world’s largest airports with 60 million passengers a year taking off and landing there. American Airlines, its main user, is among the largest, if not the largest, airline in the world.

What is the Wright Amendment protecting?

"It's an Economics 101 question ... , a no-brainer," according to Professor Craig A. Depken II of the University of Texas at Arlington, one of more than 20 economics professors in North Texas who have called for repeal of the amendment.

He goes on to observe that "it's politics where economics gets trumped," and "it's been that way since Adam Smith." How right he is, and for once we get an accurate use of Adam Smith’s legacy.

Smith believed that the purpose of the economy is to serve consumers, not producers. Depken says, "it does seem odd that business interests seem to be running this and that the consumer is out of the equation."

Congratulations to Cragg Hines (and Professor Depken) and the Houston Chronicle for their truly Smithian stance.

Another contender for the Lost Legacy Adam Smith Monthly prize?

Nelson and 'all powerful markets'

Men of Honour: Trafalgar and the making of an English hero, by Adam Nicolson, Harper Collins, 2005. Reviewed in the Sunday Times, 12 June 2005 by Lucy Hughes-Hallett

The review contains a thoughtful gem:

“He discusses Nelson’s insistence on his captains’ freedom to act on their own initiative in terms both of backward-looking medievalism and of Adam Smith’s future-shaping vision of the all-powerful market.”

What can Nicolson mean by this linking of Admiral Lord Nelson in 1805 with Adam Smith (who died in 1790)? What ‘future shaping vision of the all-powerful market’ did Adam Smith write about?

Enough to make it necessary to buy Nicolson’s book, apart from a genuine interest I have in Nelson’s navy, having written a serious study of Captain Bligh (Captain Bligh: the man and his mutinies, Duckworth, London, 1989).

I will in due course report on what I find.

The invisible hand again

Science & Theology News
Quincy, Mass., USA
The science of compassion
Compassion is about more than being nice to others. It is living a more spiritually satisfying life. By Matt Donnelly(June 10, 2005)

Marc Ian Barasch is the author of Field Notes on the Compassionate Life and is a leading voice in discussions about living a more holistic life. Science & Theology News web editor Matt Donnelly spoke with Barasch about Field Notes, the role of religion in a compassionate society and the very real connection between the brain and the heart.

Two paragraphs from Barasch's replies to Matt Donnelly:

“Look at Adam Smith and his idea of the Invisible Hand. Smith said, crudely put, that through the mediation of this providential Hand—which, by the way, strikes me more as a theological than a scientific construct--the pursuit by each of his or her self-interest will miraculously translate into good for all…

I mean, look at the society we’ve built under that set of assumptions, which is magnificent in so many ways. But what of the inequitable apportionment worldwide of the goods needed for some basic level of material well-being? The Hand has been too graspy, too sticky-fingered, to very dexterously sort that out. It’s been all thumbs. It certainly produces, efficiently and in great quantity, this great torrent of goods and services, but rather blindly, with little consideration of deeper values and collective effects. The Hand has been for a century positively throttling the environment. Our current civilization is devouring the planet to produce the superfluous junk of mass shopping culture, which hardly conduces to living together compassionately, let alone sustaining the earth. We can’t continue on this path, and I’m not twiddling my thumbs waiting for the Invisible Hand. We’ve elevated egocentricity to social and economic policy, even a raison d’etre.”

That is some giant construction placed on a single isolated metaphor in “Wealth of Nations” that referred to a special case where, because some 18th century “merchants and manufacturers” (basically small scale traders and small scale but skilled handicraft workers – forgers, blacksmiths, farm implement makers, saddlers and coachbuilders) preferred to sell their produce locally rather than export it for ‘distant sale’, this unintentionally benefited national prosperity. Smith suggested they were led by an ‘invisible hand’ on this occasion to benefit the national interest, although individually they believed they did so for themselves.

That’s all there is to Smith’s invisible hand! He only mentioned twice more but neither of them were in “Wealth of Nations” (1776). He mentioned it onnce in a “juvenile essay” (1743-49) on the “History of Astronomy” in reference to pagan superstitions that everything that happened to them was guided by the ‘invisible hand of Jupiter (the Roman God, not the planet), and again in “The Theory of Moral Sentiments” (1759), this time referring to the behaviour of feudal lords who spent their money on trinkets, baubles and other trivia, sold to them by ‘merchants and manufacturers’ and thus weakened their political and military power.

We should note that the metaphor was not Smith’s at all. It was Shakespeare’s, over 150 years earlier in his play, “Macbeth” (3.2): ‘with thy bloody and invisible hand’.

From an isolated metaphor, the invisible hand has been made into an all embracing general maxim, analogous to the ‘market’ What Barasch writes is a travesty of Smith’s intentions or meaning. All that Marc Barasch complains about under the astonishing rubric, ‘The Hand’, has nothing at all to do with Adam Smith’s legacy.

In the spirit of Barasch's book we must show compassion. Obviously he never read "Wealth of Nations" (but neither have almost everybody who quotes from it) and therefore he has been misled by the very visible (in its consequences) hand of misinformation. Perhaps Barasch will show similar compassion towards Adam Smith's legacy in future?

Almost right, but then he blew it 2

Dick Armey is former US House majority leader and co-chairman of FreedomWorks, a grass-roots organization that promotes principles of limited government. He gave the remarks quoted below at a luncheon in Lansing hosted by the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan, USA,. on 24 May, 2005, published by the Mackinac Centre on 9 June 2005 (courtesy of google).

First Dick Armey’s good bit:

“Adam Smith, by the way, best defined the public interest (as he did most everything best) in 1776. And don’t you think it is a marvelous accident of history that "The Wealth of Nations," the treatise that created the discipline of economics, was a treatise on free enterprise written in the year of the work of the greatest historical experience of free enterprise in the history of the world? In 1776, in "The Wealth of Nations," Adam Smith said the ultimate economic activity is consumption. To the extent that the government intervenes in the affairs of commerce, it should do so on behalf of the consumer. … That is still, for me, the best definition of the public interest.”

[With which I completely agree!]


Then Dick Armey spoiled his chances for June’s ‘Lost Legacy’ Adam Smith Monthly prize:

‘After "The Wealth of Nations" came out, I’m not sure that any other book ever needed to be written. So words like "laissez faire" still have meaning to me.’

As regular visitors to “Lost Legacy” will know, Adam Smith never mentioned the words laissez-faire and his book was not about complete freedom for businesses. In his day “merchants and manufacturers” were most likely to conspire against the consumer by forming monopolies and raising prices. He wrote against the interventions of the 18th century governments he knew about because they imposed “Mercantile” policies that undermined or slowed down economic growth, from which he expected that rising prosperity would spread opulence to all consumers, whatever their stations in life. He did not address prospects for their behaviour in future, except he cautioned that economic freedom must always be within the law and under justice.

“Wealth of Nations” is a polemic against 18th century economic policies and the inevitable tendencies of “merchants and manufacturers” to rig their markets.

Dick Armey’s advice in the first paragraph quoted that “To the extent that the government intervenes in the affairs of commerce, it should do so on behalf of the consumer” is the authentic Adam Smith. His second paragraph unfortunately repeats a major misinterpretation of Adam Smith’s legacy.

Candidate for The Adam Smith Monthly Prize 2?

From The Washington Times, 8 June 2005

"Ferme la Airbus" By Bruce Fein

"Colbert's mercantilism eclipsed Adam Smith's free enterprise."

“Centuries ago, Adam Smith's "The Wealth of Nations" scorned Airbus-type subsidies.
‘The bounty to the white-herring fishery is a tonnage bounty; and it is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching not the fish but the bounty.’ "

Bruce Fein is a constitutional lawyer and international consultant with Bruce Fein & Associates and the Lichfield Group.

Fein’s full article can be read at http://washingtontimes.com

Spreading the Word 3

My Blog letter to John Tierney has been published in full by the Intellectual Conservatives web site: www.intellectualconservative.com in Arizona, US. This is one of several blog sites and journalists around the world I am in correspondence with. Each exchange spreads the word that there is a real Adam Smith legacy which has little to do with the one purveyed in academe and popular politics (Left and Right).

You can help by forwarding this and other messages, with the URL: www.lostlegacy.co.uk Thanks for all who do.

Gavin


Star Wars, Altruism, and Adam Smith
by Gavin Kennedy07 June 2005

John Tierney argues that the Star Wars script borrows from Adam Smith in portraying selfishness as the alternative to altruism -- a thorough misreading of Smith.

In his review of the new Star Wars film, John Tierney asserts that the script writers had used Adam Smith's philosophy to generate the plot lines. He claims that Adam Smith noted that you could rely upon your family -- but not the wider world of strangers -- to be altruistic. He asserts that in prehistoric times humans lived in small clans and each member was altruistic in order to survive; they helped each other when times were tough. But modern society has changed all that, and nobody can rely on others now. Additionally, Tierney writes that Smith's economics led to selfishness being the dominant relationship mode, as evidenced in what made capitalism work.

Of course, none of these assertions are true. Tierney does not understand the nature of 'altruism' in small clan societies, and does not understand Adam Smith's moral philosophy or his economics of bargaining in markets. Smith's criticism of benevolence ("the supreme virtue of the Deity") was that it could never be enough to deliver to each of us what we need just to maintain a basic living because we depend on millions of anonymous strangers. That is why markets evolved: to deliver what we all need on the basis of free harmonious exchange."

Altruism was/is conditional in practice. Members of a small clan did not practice unconditional altruism. It is reciprocated, or it does not happen for long. Free riders are punished, starting with avoidance, and leading all the way to exclusion from the clan. If this was not so, a clan with non-altruists among them would quickly disintegrate ("if you do not work, neither shall you eat"). Only the young and the sick receive assistance without reciprocation and, then, only while the clan has surplus food to go around.

Punishment of non-reciprocating members is mandatory. It can be seen in modern chimpanzee groups -- individual chimps groom other chimps that groom them, and do not groom chimps that have not reciprocated to earlier grooming sessions (unless compelled by the Alpha males).

Modern humans are no different, as a moment's introspection will testify (people outside the family who do not return proportionate favors when you need them are avoided and become the focus of furious family rows, and the gift/favor exchange cycle terminates).

Adam Smith did not advocate selfishness as a principle of human interaction. He regarded 'self love' as insufficient. The dependence of modern humans on each other is now total. Millions of anonymous people work to bring you and the rest of us everything we depend upon to live moderately well. He showed this on a smaller scale in his description of the division of labour in Book I of Wealth of Nations (chapter 2) in respect of the common laborer's rough coat.

The dependence on the efforts of anonymous strangers characterizes human society, more so today than ever, because our 'needs' have expanded exponentially.Nobody in a lifetime could possibly know what everybody needed to provide them with the food, clothing, shelter, consumer goods and the extras that they require to have anything resembling an acceptable living. Hence, relying on the altruistic exchanges in a family group would soon reduce your living standards to poverty levels. It was this that Adam Smith drew attention to.

His conclusion was not that the alternative was selfishness (a complete misreading of Moral Sentiments and Wealth of Nations, a not uncommon feature of what has happened to Smith's intellectual legacy). Reciprocal exchanges developed in what he called markets to generalize the needs of societies consisting of many clans, families and strangers (the majority).

Look again at his advice not to rely on benevolence when you want to secure your dinner from the "Butcher, the Brewer and the Baker." Smith advises you appeal to their 'self interest,' not your own! You do this by persuading them to conclude a "bargain" -- "give me what I want and I will give you what you want." This is the conditional proposition. Markets enable billions to conduct their reciprocal exchanges peacefully and harmoniously.

Tierney may believe that he works for the New York Times for himself and his own self-interest. Not so. Instead, he works to serve the interests of others by receiving the means (wages) to supply the multitude of others whose output he wishes/needs to consume. And the multitudes do likewise for Tierney.

Indeed, Adam Smith's message is the exact opposite of the way Tierney portrays it. You serve your own interests best by serving the interests of others. If you withdraw from society, your living standards would soon collapse with the same certainty as your ancestors would have experienced, had they withdrawn from collaborating and reciprocating with their fellow clan members. If they had done so early enough in their lives, before they had lived long enough to breed, the unbroken chain of life from them to us would have terminated.

I discuss this central theme of Adam Smith's philosophy and economics in my book, Adam Smith's Lost Legacy (Palgrave Macmillan, March 2005).

A Potential Contender for Adam Smith Prize for the Solution of the Month

William P. McGowan PhD might be a contender for the Adam Smith Solution Prize of the Month (depending on who else contributes in June) with his piece in Canyon News, Beverley Hills, California on 5 June 2005.

I quote below a paragraph from his article lauding the 'No' vote in France and the tendfency to protectionism in the EU (he does not mention the USA, however, which is as highly protectionist an economy as the EU (and to be frank, almost all other countries too):

"Smith’s main point was that protectionism was a fallacy, and that while many believed it “protected” this or that industry, it did so at the expense of the common good by forcing everyone to pay higher prices for goods and services. Examining the price of bread, Smith found that British bread was significantly more expensive than bread made with French, Russian, or Polish wheat. Since the cost of food consumed an inordinately high percentage of a poor person’s wages, the cost of this protectionism did (and still does) fall heaviest on those least able to afford it. "

But despite the above defects (plus some others, such as saying Smith favoured Britain dumping the Corn Laws and buying its food instead more cheaply from the "United States and Australia", neither of which existed as states in 1776), McGowan writes forcefully and accurately about Smith's views. This makes him a contender, at least, for the June Prize.

Smith on Bargaining and Self Interest

Prof. Wahiuddin Mahmud in an interesting article on “Ethics in Banking”, New Nation, Bangladesh, on 2nd of June 2005, makes a typical error, all too common today in interpreting Adam Smith’s legacy. He writes:

“Adam Smith was also a great believer of the virtues of the so-called "invisible hand" of the market, which is supposed to work through the self-interested behaviour of businessmen. As he made it clear: "it is not from the benevolence of the butcher............or the baker that we expect our dinner, but from their regard to their own interest." This was the origin of how 'rational' behaviour in economics, defined in terms of maximising self-interest, was implicitly given a moral validity. “

Professor Mahmud has not thought through his own statement. The market, which he confuses with the so-called invisible hand (another topic entirely), is “supposed to work through the self-interested behaviour of businessmen”.

But what about the consumers – the other parties to the transaction? Are they acting from self-interest too? Yes, of course, they are, but how then does the market work? If the parties to the transaction work solely through the maximisation of their self-interest how then can they agree on bargains? Or is it a zero sum game solely because what one gains the other loses? This contradicts Smith’s belief that in trade both parties gain.

Adam Smith is quite clear about what happens. In the same passage quoted by Professor Mahmud he advises you to appeal not to your own interest but to the self-interest of the ‘butcher and the baker’. And what is true of the buyer must also be true of the seller.

The butcher and the baker try to sell their products to people seeking their dinners by appealing to their customer’s self-interest and not their own. Now it gets interesting. If each party appeals to the other party’s self-interest and not their own they are acting as if they are maximising the self-interest of the other party in the transaction and not their own. Therefore, they are not ‘maximising their own self interest’ but modifying their own self interest by addressing the other party’s self-interest. And this makes Professor Mahmud’s interpretation of Adam Smith contradictory.

In short, Adam Smith did not teach that self-interest dominated market transactions in the manner that Professor Mahmud (and many others) assert. Markets harmoniously mediate the selfish motives of the parties through our endeavouring to obtain what we want from others who want something from us. This is the essence of transacting through bargaining: we serve their own interests best by serving the interests of others.

A Tale of Two Cities a continent apart

Adam Smith’s lowly en passant metaphor, an “invisible hand”, is out of control. It is applied to everything and anything, including the two examples below, one written by a Republican construction worker in an attack on the Democratic Party and the other by a sub-editor, casting around for a headline, and in a supplementary one its economics are hopelessly wrong.


San Francisco Chronicle
TWO CENTS Ever bitten the hand that fed you?
Friday, June 3, 2005

As a middle-class construction worker who votes Republican, I get accused of this by Democrats all the time. I prefer to believe it is the "invisible hand" of Adam Smith that Democrats are biting when they vote for higher taxes and increased public welfare..
Glenn Munlawin, Vallejo

A More Visible Hand
New York Sun Staff EditorialJune 3, 2005

In a testament to the durability of bad ideas, the landscape is littered with monuments to discredited "economist" Karl Marx. His well-kept London grave is a pilgrimage site of sorts. Yet Adam Smith, the 18th-century expounder of an economic system that actually works, lacks a memorial worthy of his place in the economic pantheon. London's Adam Smith Institute is finally trying to change that.

Meanwhile, from another continent….

Meanwhile, on another continent, from Bangladesh, we have another version of the invisible hand, this time used incorrectly in its misapplication to economic equilibrium. The invisible hand had nothing to do with the balancing of ‘supply and demand’, as suggested by Masihur Rahman in The Independent (internet edition) 2 June 2005.

This is is the second time in a week I have seen it used this way, also from Bangladesh (someone must be teaching it thus and his students are spreading the error around) :

“Division of labour increases output [productivity] and entails exchange; the competitive market facilitates exchange to the mutual benefits of all the parties to the exchange. Adam Smith famously called it the invisible hand which balances the supply of and demand for goods [market equilibrium].”

I should add that Mashir Rahman's article, from which the extract refers, gives an excellent account of the economics of corruption and is well worth reading (it can be found via Google).

Spreading the Word 2

From Moscow Times, Moscow 2 June 2005

"Getting Adam Smith Right"

In response to "Saving Russian Energy from Reform," a comment by Gianguido Piani on May 30.

Editor,

Piani makes a strong case against some serious problems of electricity supply in Russia. That he drags Adam Smith into his case is unfortunate.

Smith did not exclude roles for government in his "Wealth of Nations." The roles he envisioned far exceed the boundaries set for the state by those who have misused his legacy and portrayed him as a laissez faire zealot, which he was not. He never used the words laissez faire, nor did he support it as a general policy.

From his "Wealth of Nations" we can deduce how Adam Smith might have considered the situation described by Piani that applies to interruptions in electricity through inadequate investment by private owners.

For exactly the same reasons that Smith opposed monopolistic pricing and, interestingly, supported laws restricting lenders to an official maximum of 5 percent interest, he would have approached excess profits and inadequate investment in electricity in the same manner.

If food suppliers or electricity companies promise to supply customers with goods but do not deliver, leaving customers without their dinners and the means to cook them, they likewise commit fraudulent acts and should be liable for them.

Gavin KennedyRiccarton, Scotland

Spreading the Word

Working Wounded Blog: Earnings vs. Environment, Part II
Readers Weigh In on GE's Decision to Reduce Greenhouse Gas Emissions
(ABC News)
By BOB ROSNER

"June 1, 2005 — News Flash: Eighty percent of ABCNews.com readers support the position taken by GE to voluntarily cut greenhouse gas emissions"

Bob Rosner’s column this week contains a quotation from my message of support to him in his critical comments on the Wall Street Journal’s use of Adam Smith’s name to assert that corporations have no moral responsibilities other than making a profit, a wholly misleading assertion that I also criticized:

"This is a complete misreading of Adam Smith and his legacy. The 'invisible hand' metaphor is not evidence that Smith advocated laissez-faire and a hands-off policy toward 'merchants and manufacturers.' Given he wrote in the 18th century in Scotland, he never knew capitalism (a word not invented until the mid-1850s), nor the modern corporations of today. His 'manufacturers' were lowly tradesmen (blacksmiths, locksmiths, coach builders, saddle makers, candle makers, iron mongers and such like; individuals who sometimes hired help, often worked alone). His 'merchants' were market stall holders, not the likes of Wal-Mart.

'Wealth of Nations' itself is a polemic against leaving 'merchants and manufacturers' to their own devices, and Smith provides many examples of the wholly negative consequences of doing so."


One of the other quotations Bob Rosner reported worries me. The contributor wrote:

"Perhaps it is time for higher education to 'rethink' introductory business concepts, and relegate Adam Smith to a historical footnote."

Higher education certainly should rethink the contents of its courses but relegating Adam Smith to a ‘historical footnote” would be most unfortunate. We call this “throwing the baby out with the bathwater”.

It is Adam Smith’s lost legacy that should be thrown out, not attempts to remind new students (and a lot of older ones!) of what Smith actually wrote about. He was opposed to leaving the ‘merchants and manufacturers’ of his day to do whatever they wanted, and it is not in the slightest an exaggeration to assert that his strictures on the cavalier abandonment of any notion of moral and social responsibility on behalf of modern corporations would likewise have been fiercely resisted by Smith.