There but for .......

From the "Baseball Toaster" in Alemeda, California:

The Juice Blog, 30 August 2005

“Major League Bling”

by Scott Long

“I'm generally not a basher of athletes and how much they make, as I realize it's all about them free markets. (Do I sound like Adam Smith?)”

Apparently, the subject of Scot Long’s piece is a Mr Dwight Gooden, a former baseball star, who is having trouble with habits he has picked up that bring him to the attention of the ‘boys in blue’. These excitements become news items in the tabloids and cause much ‘tutt tutting’ among respectable folk, who previously fawned and fed the ego’s of yesterday’s sportsmen and women, and made them into ‘celebrities’ in the usual intrusive and vulgar manner.

When the crowds stop cheering and the hero retires, the main sparkle of their young lives has gone, forever. The nearest they get back to it is in a haze of memories, well watered by whatever gives them relief. Sad, but it’s an everyday story and not just one for great athletes. All kinds of people ‘succeed’ and then falter; and drink or drug themselves to death; slide into depression and end up on the street, sans family, sans friends and sans hope, and in Dwight Gooden’s case, sans a ‘Beamer’.

Scott brings Adam Smith into the story, more I think as an attention piece: think wages, think markets, think Adam Smith. It makes a good line and has the advantage of being a recognized name – even, perhaps, a celebrity, albeit from the 18th century. Markets do not provide happiness, not guarantee a happy ending. They provide the means only to whatever you believe will bring happiness, or at least respite from hunger, thirst, cold and fatigue (try living without respite). What we do with the means we acquire from markets is another story altogether.

People drop into the pits from all points in the income range – knock on any door in any street in any country and you may find someone on their way to the pits, some few even recovering from their trip to the pits, and many who know nothing about the pits and never will.

The Dwight Gooden story is only one such story that could be told.

Out of the Storm Came Forth Reason

The storms affecting the US, and New Orleans in particular, are the subject of an interesting debate on www.divisionoflabour.com on what Americans call ‘price gouging’ and what Brits call ‘profiteering’.

The storms cause damage to houses and people need experts to fix the damage by repairs or replacements. There are a fixed number of repairers in a locality and suddenly demand for their services jumps. What should happen? Should prices be allowed to rise; or should they be fixed by the authorities?

This is an age old problem in economics. Smith discusses the responses to local dearth (famine) in “Wealth of Nations”: VI.v.b.1-53: 524-43: Digression concerning the Corn Trade and Corn Laws”.

Below I reproduce a contribution in the comments section of Division of Labour (forgiveness sought if permission not granted) in which ‘Matt’ responds to ‘Stephen’’ (and ‘doinkicarus) who had argued for price controls:

“Stephen.... Prices are always the best mechanism for distributing goods, and emergencies are no exception.

Consider a hypothetical case where a hurricane has just created a lot of damage. There are plenty of people who will need roof repairs or trees cut or any other given thing. You are right that there is too little time for new firms to begin, and right again in believing that the number of roofers, tree cutters, etc. in the immediate area is likely too little to fulfill demand. Given that there is a set number of roofers, tree cutters, etc. in the immediate area, supply too will also be fixed. The hurricane has just created a huge demand shock for these services, and the first thing to happen is a price jump (when legislation doesn't get in the way that is). If we assume that the market was previously competitive, then the individual roofers and tree cutters will enjoy some newfound economic profit.

So where are we at? The "rich" all have a new shiny house while the rest of us are left with a new sun room? No. This is only the first stage of economics at work. Here is what you missed: There exist firms outside the immediate area who can fulfill the demand. These firms notice all the economic profit being earned and they move in to get a piece of the action. Eventually the prices fall and all the necessary demand is satisfied. Your argument is that this “eventually” is just far too long to wait, after all, we’ll be dead by then right? No. We really don’t have a choice. Consider what happens if some politician agrees with you and concludes: “No, we cannot wait for prices to adjust. We must force them to!” Well, if prices are held at their previous level, then there is no incentive for the out-of-town roofers & tree cutters to enter the area in the first place! So now we are trying to repair the damage with far fewer workers! And the damage will be repaired faster in this situation!?

Now it is true that the people with the highest reservation prices will have their houses fixed in no time, because it is most valuable to them. This does not necessarily have to be “the rich,” some rich people might have other homes to move live at, and will hold off repairs of their vacation home until prices drop. Other possibilities exist. On a side note, that whole line about Bill Gates is just loaded. This type of thing occurs everyday, and people are perfectly fine with it. Children die, you buy ice cream. Couldn’t you have forgone that ice cream and donated your money to buy much needed nutrition for some poor, starving, innocent, young child in some tormented third world country? It isn’t always the rich who make decisions that can appear like “bad outcomes.” This is similarly applied to doinkicarus’ reasoning here.

In a cruel response to doinkicarus’ observation that oftentimes people place values on goods that are higher than they can afford, I say: too bad. I value a brand new HDTV at it’s selling price, I value a new car at it’s selling price, there are plenty of things that all of us want but can’t afford. This is nothing new! The same goes for goods in times of crisis. Some people’s homes might be wiped out and they can’t afford a new one. Well, it certainly is tragic, but too bad. That is the way risk works, if you live where hurricanes live, you might be wiped out. Homes are important, but the person who cannot afford to rebuild must move somewhere else, where they can afford. It is harsh indeed, but it is reality. Now back to the real reality, aid programs and such dole out money to help people who’ve chosen to live in a risky area rebuld at the expense of people who made safer decisions in other parts of the country, so this situation might not exists very much…but that’s a different story.

Endnote: If it gives any credibility to my story, I am from Florida and I have my fair share of experience with hurricanes and natural disasters.

Posted by Matt at August 29, 2005 08:56 PM © Division of Labour 2005”

Now that is why “Division of Labour” is one of the best economics’ Blogs around. Good debate, not abuse; treating the subject with respect, and the other debaters, not with bad manners, and being instructive to all willing to learn. "Congratulations to the people at Division of Labour".

The Menace of Hyjacking Adam Smith

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“The menace of hijacked capitalism”
An economist argues that to vanquish terrorism, poverty and crime, dirty money must be reined in

By Cecil Johnson, a Fort Worth-based free-lance writer. I review the review and should say at the start hat its general thesis is correct: Criminal activities undermine free markets, but the remedy already exists: it’s called justice.

To make his points the author, Raymond Baker, a 40-year business veteran and guest scholar at Brookings in Washington, DC, picks on Adam Smith, or at least the public’s version of him, to add support to his case.

The reviewer, Cecil Johnson, a free-lance writer from Fort Worth Texas, writes:

“Adam Smith has to be whirling in his grave because of what dirty money dealing is doing to capitalism, says the author of Capitalism's Achilles Heel in his illuminating and disturbing new book.”

For a start, Adam Smith would not know what capitalism is, either the word or the phenomenon. He lived (1723-90) long before capitalism became a reality in the 19th century. He lived in a world of mainly small markets, peopled by small traders and local farmers. The former sold simple agricultural implements made of manufacturers (artisans, tradesmen), likely to be bought by farmers and simple household utensils and small specialty goods, cloth and trinkets; the latter sold farm produce to consumers and cattle, sheep, goats, pigs, and chickens to each other. This is a long way from the large joint stock companies and global companies of today.

Quoting the book, the reviewer says:

"Adam Smith today would be appalled to see that the pursuit of fraudulent transactions and illegal profits has become utterly routine, unencumbered by the moral safeguards he envisioned, generated by people lacking the traits of character he knew were necessary for effective conduct of the free market system," Brookings Institution guest scholar Raymond W. Baker writes.

The idea that Smith would be innocently ‘appalled’ at the behaviour of the owners of land and businesses is quite wrong. He knew all about the mischevious behaviour of ‘merchants and manufacturers’. In fact he spent pages detailing their conspiracies and cheating ways. He was not an idealist who saw markets and the people running them as saints. He advised the greatest suspicion of anything they did and knew all about corruption at all levels. He was, after all, living in 18th century Britain at a time noted for it large scale corruption, socially, politically and commercially. He wrote harshly about the great joint stock companies operating in India and elsewhere for their criminal ways. Why should today’s corruption ‘appall’ him particularly? Using Smith’s name to lend a bit of drama to Baker’s message is unnecessary and gives the wrong impression of the worldly sense of the author of “Wealth of Nations”.

Cecil Johnson continues:
“The author, who spent more than 40 years in international business and is a senior fellow at the Center for International Policy, imagines that if Smith were to return today he would be "heartbroken" to find that distortion of his economic thesis has simultaneously generated great wealth and huge economic gaps that have stranded three times more people in poverty as there were living in the world when he wrote The Wealth of Nations.”

This concedes the false point that capitalism creates poverty, which is nonsense. The absence of capitalism creates poverty. Markets create wealth, the only antidote to poverty that works. The poor have not been ‘stranded in poverty’ by anything Smith advised; indeed, the adoption of market forms, even under communist dictatorships in China and Vietnam, the extention of markets in India, Asia and Central and South America, removes people from poverty far quicker and more certainly than alternative attempts at state managed interventions. Markets that are closed or closing (Cuba, North Korea, Iran, Venezuela, and much of sub-saharan Africa, including I am sorry to see the creeping intervention of the State in South Africa) are creating and maintaining poverty on a grand and sickening scale. This would appall Adam Smith.

The follows a disappointing sentence (from Baker, not the reviewer):
"If he [Smith] chose to remark on the invisible hand, he would identify it now with international pickpockets lifting the purses of the poor for deposit into the far-flung accounts of the rich," Baker writes.

Oh dear! Smith only mentioned the invisible hand three times in his long career and on each occasion it had nothing to do with markets. He never meant it as an all purpose metaphor to claim that pursuing one’s self interests always, or necessarily, benefited society. Smith was not stupid. He knew, and wrote about, self interest having malign outcomes, as it must when a person chooses to do a criminal act. That was true in the 18th century (and every other century before and since). Some outcomes are benign; others are malign.

The reviewer, Cecil Johnson, paraphrases Baker:
“It is a picture that would, indeed, make Adam Smith weep. He believed that capitalism would spread the wealth to all sectors of all societies. Of Course, Smith's version of capitalism, as Baker points out, was based upon a presumption of honesty and compassion for others.”

As above, Smith certainly practiced ‘honest and compassion for others’ but was not naïve to presume it in others. His “Theory of Moral Sentiments” detailed what is necessary to live a moral life – he was optimistic that many others would behave in such a manner – but was equally conscious of the ‘vileness’ and ‘mendacity’ of people if allowed to do whatever they wanted in the course of harming others. Hence, Smith persistent and loud clamour for justice – the negative virtue absolutely essential in a market economy, without which society would ‘crumble into atoms’. And that is the remedy for the criminal acts of anybody in a market system and in a decent society.

Cecil Johnson makes this clear in his last point:

“Baker makes it clear that the survival of freedom is inextricably linked to the survival of capitalism. He makes a case for curbing the abuses of dirty money to curb poverty, reduce crime and defeat terrorism.”

Adam Smith would say ‘Amen’ to that sentiment.

The book:

Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System By Raymond W. Baker, John Wiley & Sons 438 pages $27.95

If Age but Could and Youth but Knew

New York Times, 28 August 2005; eTaiwan News, 29 August 2005 ("voice of the people, bridge to the world")

Ben Stein, of whom I have written here in praise of his understanding of economic policy has written some advice for your ‘Freshers’ going up the their Universities for the first time; in doing so he reveals why he is well informed in economics:

“Until I got to my later economics courses with the redoubtable Professor C. Lowell Harriss, and until sophomore year, when it was my luck to have as a mentor and friend the visiting professor Milton Friedman, the greatest economist since Adam Smith, I knew little of how to get and spend and invest.”

Some accolade for Professor Milton Friedman; a might exaggerated, maybe, but I won’t quarrel about it. He certainly spoke and wrote a lot of sense’ The only time I heard him lecture was when he visited The University of Strathclyde and gave a powerful address on monetarism to a pack auditorium. He opened with his greetings to the ‘Republic of Letters’, - the ‘one true republic’ he called it. The University authorities had been expecting ‘trouble’ from opponents of Mrs Thatcher’s policies (those were those kinds of days). None materialised, which left the attendant University Janitors prominently placed around the hall, presumably to deter trouble, the best informed Janitors in monetary economics of any other British university.

Stein continues:

“I have read what in my opinion are the two greatest works of economics ever written: "The Wealth of Nations" by Adam Smith and "The Monetary History of the United States" by Milton Friedman and Anna Jacobson Schwartz, my mother's best friend from Barnard. Neither book makes much reference to connections, except for a sneering reference by Smith to "aldermen's wives" and their obsession with "place." And on the macro level, connections mean little. But on a personal level, they mean everything… Vitally, success in life is so much about connections and whom you know, those staples of bubbe meises (a Yiddish term meaning something like "grandma's wisdom") and so little about memorizing even the greatest of plays, like "Richard II," or knowing how to weigh the moon, that there should be a special seminar in making and keeping connections. It is embarrassing and demeaning that this should be so, but it is so and has always been so.”

Should Ben Stein read my “Adam Smith’s Lost Legacy” (Palgrave Macmillan, 2005: ISBN: 1-4039-4789-9) he will see the great extent to which Adam Smith practiced what Ben preaches about using ‘connections’, or what was known in the 18th century as working the ‘Interest system’.

Smith owed all of his advancements, from Glasgow to Oxford University (1740); from unemployment in Kirkcaldy to paid Lecturer in Edinburgh (1746-8); to appointment as Professor of Logic at Glasgow University in 1751 to Professor of Moral Philosophy in (1752- 63); to appointment as tutor to the young Duke of Buccleugh (1764-6); and his final appointment as a Commissioner of Customs in Scotland (1778-90) to his connections and his powerful political alliance with the 2nd and 3rd Dukes of Argyll, the government’s ‘fixers’ in Scotland.

In fact, Adam Smith is a model case study in how to get to know people and to get people to know you. His case shows that ability is seldom enough; without it, luck might help; but with it and with connections the combination is devastating. It would possibly make suitable material for Stein’s wished for ‘special seminar in making and keeping connections'.

Ben Stein also adds (there is much more in his article than I can quote here without breaching copyright!):

“Even more vital is the ability to work. Many college students think that work is slavery and captivity. Far from it. Labor is dignity, mental health, a grasp on reality. Freud said that nothing grounds a person so powerfully in reality as putting emphasis on work ("Civilization and Its Discontents"). In "Tommy," the Who said that "freedom tastes of reality" - at least I think that's what they're saying. Work, especially when combined with clear thought, makes possible a career of plenty and achievement and pride. Work is the key that turns almost any lock in the material world."

I have always believed, always said, especially to my children and to anybody I hear demeaning work, or worse, demeaning the people doing what they regard as humble jobs: “There is dignity in work”. And this applies to whatever work you do. Never, ever, be too proud to accept a job when you need one that is ‘below’ your normal line of work. Being voluntarily unemployed is demeaning; making an effort to feed and maintain yourself and your family (which includes anybody depending on you) is never demeaning, no matter what work you do.

Adam Smith retained his respect for the ‘common labourer’ (they did not have wives with the petty wishes of ‘Aldermen’s wives’) no matter how high he rose in fame. He worked hard for his pension, but typically, he gave most of it away in acts of private charity and died with a modest residue. A moral man, indeed.

Islamic Economic Policies Should be Tested

In an article in Contracosta.com the predicament of the differences between and unreconstructed Islamist and a scientific approach to economics is outlined

“Islamic, secular ideals at war: Creators of constitution must grasp economics” by Timur Kuran, a professor of economics and law and King Faisal professor of Islamic thought and culture at the University of Southern California, explains Islamic economics clearly. He is also the author of "Islam and Mammon: The Economic Predicaments of Islamism."

His article does not make comfortable reading. The gap between the Islamic position it explains and western economics is so wide that there is little room for negotiating a compromise. I have quoted some extracts from Kuran’s article:

“To understand the constitutional battles, observers must grasp not only the principles of Islamic law, or Sharia, but also Islamic economics -- an esoteric modern doctrine that would befuddle Karl Marx, Adam Smith and even the Muslim jurists who, a millennium ago, developed the principles on which it claims to be based.

Sadr's economic vision is developed in "Our Economics," his masterwork published in 1961.
The purpose of "Our Economics" is to discredit both capitalism and socialism as flawed and alien systems, offer Islamic economics as a vastly superior alternative and demonstrate that Islam harbors solutions to a panoply of vexing economic problems. In both capitalism and socialism he finds virtues. Islamic economics, he says, embodies all of these virtues while escaping their numerous vices.

Take poverty elimination, which a socialist society pursues through mandatory wealth transfers. Islam exhorts its adherents to assist the disadvantaged, and it teaches those of means to participate in a decentralized transfer system called "zakat."

Like practically every other modern Islamist, Sadr considers interest illegal, in the belief that the Koran bans it categorically, regardless of form, purpose or magnitude. At the same time, he repeatedly praises the market mechanism, arguing that the pressures of supply and demand should be respected, not resisted.

"Our Economics" seeks to overcome the contradiction through moral training aimed at removing wants liable to produce un-Islamic outcomes. If Islamic education makes people equate interest with unearned income, demand for interest income will disappear; hence, there will be no interest-based lending.

Accordingly, secularist anxiety about Dawa goes well beyond the substance of its current policy positions. In the rough-and-tumble of Arab politics, Islamist parties will enjoy an advantage in any national debate by virtue of their ability to frame their own position, whatever its content, as uniquely Islamic and rival positions as evil.”

One of the many problems in the above is seen in the last paragraph quoted. If a proposition for practical change cannot be tested and is decided by 'faith' whatever the outcome, it is not scientific.

For example, the best way to test an economic policy is to apply it in, say, one country and observe its performance against alternative policies elsewhere. If what the Dawa proposes in its economic policies works better, or even as good as elsewhere, then we should consider it seriously; if it doesn’t then we shouldn’t. That is how science has developed since the first millennium of the common era.

On this test, socialism and communism failed. All migration in the world is into the capitalist countries and not the few remaining communist countries. So far, the article reports that Pakistan and Iran have imposed the economic policies advocated by the Dawa to no visible effect on the problems of capitalism (relative poverty of minority and its non-relief by the voluntary Zakat). Economists will recognise the ‘free riding’ problem. Renaming ‘interest’ as ‘administrative charges’ does not a moral example make: faking results is as dishonest as you can be.

It is doubtful if these economic issues would ‘befuddle’ Adam Smith. A Karl Marx might be impressed with the credulity shown by those who present their ideas this way, but the rest of us are likely to be sceptical of the damage it would cause to the economies lumbered with these policies and would regret the likely disappointment of the poorest people left to wallow in their unrelieved misery.

Diary 3: Writing new book on Adam Smith for Palgrave's Great Thinkers in Ecoomics series

I am now on chapter 3, but progress is slower than usual because of my decision to check out every factual statement or opinion before moving on to another sentence, and noting the references details in a 'footnote'.

This causes quite a lot of searching work through my library and my notes or copies of articles. The idea is that I will be able to speed up the drafting and re-drafting process later in the project and that searching for the exact reference while I am on that page means I either find it, or don't. Later on, when I would normally go back to check all references (a chore either undertaken voluntarily or one enforced by the copy-editors) I often cannot remember the references or the context and I take ages trying to find them or reluctantly have to drop the material requiring a reference. If this is at the copy-editing stage, when time pressure is on (once a manuscript gets this far into printing the schedule is fixed by production) it usually occurs while I am engaged in something else.

I should make clear I am not usually enthusiastic about footnotes and normally do not use them, especially where they are used to add a commentary on parts of the text, or worse, merely inform readers that that point is expanded on earlier or later. At this stage of the writing programme, I see the references more a part of the 'scaffolding' of the text; whether they survive the drafting stages before arriving at a Final text remains to be seen. Given the important of the Great Thinkers in Economics as a near 'definitive' accounts of the people studied, I will probably feel obliged to keep them in in some form - but not for mere comments, etc. If it is not worth putting into the main text material it probably should not be in a footnote.

Already, the chapters are rather longer than will probably be required or accepted by the publisher. Palgrave's word limit appears to be firm. But that is OK; it is infinitely easier to cut back than to expand out, and any book can be improved by judicious editing and a bit or re-arranging.

Also, the usual 'problem' is arising and it too slows down writing - looking up a reference easily slips into reading the section of the book or article, which also slides into re-reading the entire chapter or article.

The main thing is that progress is being made; the book's themes are taking shape but we have some ways to go before it develops its 'voice'.

Meanwhile, site traffic is increasing and pages read on the visits is now over 3,000 a week, which I see from another Blog is the minimum regarded as 'good'; still a long way short of some Blogs I visit which get nearly 2,000 'hits' a day.

Site Traffic Continues to Climb - slowly but surely

This has been the best seven days for traffic through "Lost Legacy" since we opened in March.

A total of 827 unique visitors clicked on 1,370 times and viewed 3092 pages.

A long way to go to catch the 'Big Blog players', I agree, but "Lost Legacy" is a highly specialised site and our visitors are discriminating people.

I am always looking for ways to improve the offering and the coverage, and your suggestions are most welcome: send your thoughts to: gavin[at]negweb.com

Thank you for visiting

Gavin Kennedy

Doomsters, Place Your Bets - if you dare

A couple of months ago, 21 May: "Oh No he Didn't Say that", I had good cause to critique an op-ed by John Tierney because he misunderstood reciprocity in early human societies and Adam Smith’s metaphor of the invisible hand (actually Shakespeare’s from Macbeth, 3.2: ‘thy bloody and invisible hand’). He claimed that the new "Star Wars" film was based on Smith's philosophy (which it isn't). In Wednesday’s International Herald Tribune (24 August 2005) he comes up with a cracker – a great piece on natural resources and sustainability (‘Oil prices: my $10,000 question’).

Matthew Simmons, a fellow columnist at the New York Times, said that ‘oil prices would soar into triple digits.’ Tierney called Simmons and asked him if he would back is doomster prediction with cash, to which Simmons promptly said ‘yes’ and the result: a $10,000 cash bet between them.

In undertaking the bet, Tierney is following in Julian Simon’s footsteps, who challenged environmental writers of ‘blockbusters’ predicting a continuing rise in oil prices as scarcity squeezed supply but not demand. Paul Erlich, author of the “Population Bomb” (I have two copies for some reason in my library) took a bet of $1,000 with Julian Simon that natural resources would be more expensive in real terms in 10 years time, i.e., by 1990. They weren’t and Julian Simon collected his winnings.

Simon wrote a book, “The Ultimate Resource” (I had a copy but cannot lay my hands on it) showing the naiveté of ‘environmentalists’ who do not understand either economics or the enviorment, and who have mechanical ideas about mathematical models (remember “Limits to Growth” and how the world would end as we know it in the 1980s? – I can see that book on my shelf from where I am writing this; I should explain that six years ago I moved most of my library to France and only this summer have I gotten round to organising the books in some sort of order on the new shelves I recently bought).

The bet is that average oil prices for a year will not be $200 a barrel in 2010 as adjusted for inflation. The winner takes the $10,000 from an escrow account plus any interest earned.

And Tierney has also extended his bet challenge to anybody: ‘If you think the price of oil or some other natural resource is going to soar, show me the money.’

Now, why don’t the doomsters, panic merchants, scare mongers and environmentalists rush their bets to Tierney – he can be found on email: Tierney(at)nytimes.com – but somehow I do not think he will be kept busy covering his bets.

At Last, a Marxist Prediction is Right, but not as Marx envisaged it!

Apparently the Chinese Communist government is allowing hundreds of state companies to begin selling shares in their (often loss making) enterprises to the public. This could raise billions of dollars for the state’s coffers.

It’s as likely to set millions of workers and their families on the road to relative prosperity, albeit from a near poverty level after 56 years of communist planning, not so much from the profitable enterprises that may result as from the widening of freedom to make their own decisions, take risks, select the ‘best’ options of them as they see them, and move on without State interference in the right decisions for them (and the wrong ones – where incentives are to operate at their most powerful, there must also be penalties too).

Interesting point, as the www.fee.com site points out: whereas the Marxist theory used to assert it is not so much a case of Marx’s prediction that under communism the ‘state would wither away’ (a hopeless hoax under actual communism from 1917 onwards, and Cuba, North Korea today) it is the communist state withering away in favour of capitalism, abandoned in 1949 by the Chinese Communist Party, and after some 30 millions died in various state-caused famines.

Best Smithian Analysis for a Long Time

From "The Austrian Economists" Blog (http://austrianeconomists.typepad.com): “Why Aren’t Institutions like Can-openers?” (Posted by pboettke on August 22, 2005):

After describing the shipping of a simple can-opener to a friend in Peru who does not have, but needs, one the authors turn to the difficulty of establishing the ideas that form institutions that can drive development without corruption, totalitarian diversions and entrenched poverty:

“The transfer of deep beliefs seems much more difficult than the transfer of things. Why that is so, it is not obviously clear. Pete Leeson, Chris Coyne and I have a paper, "Institutional Stickiness and the New Development Economics" which tries to address this issue that is currently under review at a journal. This work develops themes I first addressed in my "Why Culture Matters" paper that was published in an Italian journal of political economy and then reprinted in English translation in my Calculation and Coordination. Chris Coyne's work on the political economy of post-conflict reconstruction is grounded in this puzzle and he has made great strides in the theoretical underpinnings of this argument and the empirical illustration of the point.

Again in reading for my graduate seminar in Constitutional Economics that I start teaching in 2 weeks, I was struck once again by the wisdom of Adam Smith and how it relates precisely to this point. In his Lectures on Jurisprudence, the appendix includes Smith's plan for The Wealth of Nations. On pages 578-579 of the Liberty Fund edition of this work, he has a section in his plan entitled "Concerning the causes of the slow progress of opulence." Smith states that there are two reasons for why some countries are poor while others are rich. The first are natural impediments and the second are the policies of oppressive and injudicious government. Bad public policy render a countries agriculture and its arts and commerce underdeveloped. Bad public policy, the reader is told, increase the natural impediments to development.

What are the natural impediments?

The original poverty and ignorance of mankind the natural impediments to the progress of opulence. That it is easier for a nation, in the same manner as for an individual, to raise itself from a modern degree of wealth; money, according to the proverb, begetting money, among nations as among individuals. The extreme difficulty of beginning accumulation and the many accidents to which it is exposed. The slowness and difficulty with which those things, which now appear the most simple inventions, were originally found out. That a nation is not always in a condition to imitate and copy the inventions and improvements of its more wealthy neighbors; the application of these frequently requiring a stock with which it is not furnished. (emphasis mine)

And this stock need not refer to material accumulation, but as Chris [Chris Coyne] is showing relates more to the stock of social capital that resides in the people of the nation under investigation."

http://austrianeconomists.typepad.com/

This is the kind of economic thinking that is worthwhile and is the proper use of Adam Smith’s legacy. Why can’t we have more of it?

Potential Candidate for Idiocy of the Month?

“Heliographic Book News, California PRESS RELEASE 21 August 2005:

NEW BOOK OFFERS SCIENTIFIC LOOK AT LOVE

Why will Love be the most important "technology of the future" Why is a love-dominated world no longer an idealist's dream? This book offers the remarkable case based on Science...
A major new study of humanity’s favorite subject, Love, is now available: The Technology of Love by Charles E. Hansen. This book, the first of a two-volume project, is expected to send shock-waves throughout the reading community, both general and scholarly. Hansen, who began his study of Love while a doctoral student at George Washington University in the 1970s, offers the first formal ‘working definition’ of Love applicable to the entirety of daily living; and buttresses it with a breakthrough argument that Love is a scientific reality of our Universe that is here to stay.”

Allowing for the Publisher’s hype in the press release, the item came to my attention because it mentions Adam Smith and David Hume. I have not read the book and am loath to comment on its theme without reading the evidence; hence, I have not yet put this in the file as a provisional candidate for the Lost Legacy prize: “Idiocy of the Month”. Though to be frank, it does come from California … and it may be a plausible argument, but then does sound as if it could be tacky nonsense …

Read for yourself as The Press Release continues:

“The author offers remarkably penetrating interpretations of David Hume, Adam Smith, Sigmund Freud, and others, including Jesus, to make the case that the ingredients that ultimately form the experience of Love are the same fundamental ingredients of constructive social-economic interaction in general. Thus Love is not a cultural creation nor separable from the most basic understandings of our common humanity and our social constructions, beginning with the family. Furthermore, Hansen demonstrates that Love has scientific foundations in both physics and biology that will shock even the staunchest of socio-biologists, while at the same time showing clearly that the Love-fundamentals of Religion are of the same genre. Included is the boldest scientific sifting of Jesus’ teachings yet presented with a conclusion that Science and Religion are not as separate as most modern and post-modern thinkers have held. Yet this is not a ‘religious’ book.

Finally, and of considerable significance to readers religious or secular, Hansen offers the first scientific based definition of Justice as a derivative of Love, much as Hume suggested. Thus the question: What is Justice? that resides at the foundation of Western civilization, Hansen shows to have been ‘in error’: Plato’s (or Socrates?) question should have been What is Love? For it is only after defining Love that Justice can be fully understood.”

If anybody catches more on the book’s arguments, please post them here. I will watch Amazon for a second-hand copy.

Mercy to the Guilty, Cruelty to the Innocent

Adam Smith had suspicions about the conduct of ‘merchants and manufacturers’, finding them inclined to invoke the spirit of monopoly and any contrivance they could think of to raise prices against consumers. These deeply held, and often expressed views of Smith cut right across the careless attribution to Smith of notions about laissez faire and benign invisible hands, as repeated endlessly by modern commentators and commented upon critically here almost daily.

In a recent illustration of Smith’s justified suspicions, Martin Vander Weyer, author of 'Falling Eagle: The Decline of Barclays Bank' (Phoenix), writes a review in the Daily Telgraph, 24 August 2005, of “Lords and Liars” by Christopher Mason, under the heading of “The fine art of bad behaviour” (the intended pun justifies itself in the review):

“The facts of what Christopher Mason calls "the Christie's-Sotheby's conspiracy", the
commission-fixing deal struck between the chief executives of the world's two leading
fine art auction houses in the back of a parked Lexus at New York's JFK airport in
February 1995, are not in doubt and have been published numerous times, though never
before with such a rich underpinning of bitchy detail. The morality of the case, however,
is more obscure.”

How what happened could be thought to have been morally ‘obscure’ is beyond me.
The CEOs were found out for colluding against their customers interests. In Adam Smith’s
mind that was morally wrong and, I would suppose (we are all customers for much of our
daily lives) most of us would consider what they were doing was morally wrong, unless you
share a strange view that ripping of rich customers is acceptable along the lines of so-called
‘victimless’ crimes. Poor people selling heirlooms of windfall finds are cheated by these
Behaviours as much as rich people collecting them.

Martin Vander Weyer asks:

“Was what took place between the two firms really a major crime? Or was the case that eventually brought Sotheby's chairman Alfred Taubman to jail and its chief executive Dede Brooks to a six-month sentence of home-confinement an example of overzealousness in the American courts? Were the breakfast meetings between Taubman and his Christie's opposite number, Sir Anthony Tennant, at Taubman's Mayfair flat, anything more than a matter of civilised relations between the heads of two firms with adjacent interests? Or was it all a confirmation of Adam Smith's dictum, in The Wealth of Nations, that "people in the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices"?

There is little doubt that the meetings, social or otherwise, were aptly described by the quotation from Adam Smith’s “Wealth of Nations” (WN I.x.c.27). Nor is there any doubt that this was a conspiracy for substantial gain:

“The conclusion to be drawn from Mason's account is that the misbehaviour involved was certainly on a large scale: the criminal prosecutor's estimate of the amount that Sotheby's sellers were overcharged in commissions as a result of collusion between 1995 and 1999 was $44 million, and the two firms each coughed up damages of $256 million in a civil settlement.”

“Misbehaviour”? At $44 million! What in the reviewer’s scale of robbery constitutes a crime? One of the guilty, Al Taubman, owner of Sotheby’s, receives very sympathetic treatment from Martin Vander Weyer:

“Whatever else those hands could do, there is no doubt that Al Taubman loved his wife, loved the passport to high society that ownership of Sotheby's brought him, took little interest in the details of its business, and gave very generously to charity. To be guilty of naivety and social ambition hardly deserves a custodial sentence, and our final glimpse of him as an ailing 77-year-old, queuing in the cafeteria of a correctional facility in Rochester, Minnesota, is really rather tragic.”

All persons serving their sentences in jail are ‘tragic’, including all the other persons in their 70s, few of whom stole $40 million from their customers, or a fraction of that sum. Here too, we can see where Smith understood the feelings of sympathy of those contemplating the judicial outcome after the events leading to it, based on their humanity. These people should, says Smith:

“reflect that mercy to the guilty is cruelty to the innocent, and oppose to the emotions of compassion which they feel for a particular person, a more enlarged compassion which they feel for mankind” (“Moral Sentiments”, II.ii.3.7: 88-89).

Science Tests the Observable: Religion Invents the Invisible

In Brad Delong's Blog today (Brad Delongs Semi-Daily Journal) there is a superb sentence in the anti-evolution “disturbance” (to call it a debate is beyond the meaning of the word):

"Do facts have reasonable ranges, such that we can simultaneously argue that humans evolved, and humans were created? That science, the study of the observable, should encompass religion, the invention of the invisible?"

I do not always agree with Brad (he is bit too anti-Bush on all occasions over everything for me; no President, Republican or Democratic, is that bad), but as I do not vote in the USA it really is none of my business).

On science versus religion in the issues of evolution he is on the money in my view. Brad’s Blog on economics, commonsense and the decencies of life is very appealing and I always read his Journal each day.

Science and religion will never mix: the fact that the Sun and the rest circle the Earth was once an article of dogmatic faith among Christians; it could cost you your life to disagree, which is ridiculous.

Why should anybody die for a matter of fact, or indeed for one of faith, is beyond me. The fact that you believe one thing on the basis of your faith should not need to be endorsed by me for you to fell happy with your faith. If my endorsement is necessary there is something lacking in your faith. The fact that I believe your faith to be unfounded should not require that you abandon your faith; if it did, then there is something wrong with my view of the facts. I leave you to believe what you believe, as long as you leave me to my reliance on the facts.

The realisation or discovery that it is the Earth that circles the Sun, now confirmed by science, has not established that God does not exist, etc., and no scientific discovery would overcome any religious belief.

Hence, a person's faith is beyond facts. Why anybody needs more than faith to justify their religious beliefs is beyond me.

The first essay that Adam Smith wrote was: "The Principles which lead and Direct Philosophical Enquiries: illustrated by the History of Astronomy”, written, I believe from when he was a student at Oxford University (1740-46) from around 1744 to 1750, with occasional revisions all his life. He kept his manuscript by his bedside and it was one of the few essays excused the destruction he ordered to the rest of his papers (18 or more Volumes that his friends, Professors Black and Hutton burnt a few days before he died). They published it in 1795 (it is reprinted in “Essays on Philosophical Subjects” by the Liberty Fund, available from Amazon, etc.).

Why did he keep it? I believe because it was a symbol of the time when he lost his faith in the Christian religion and decided to become a philosopher rather than a Minister in the Church, his intended vocation up to 1744.

Those attempting to impose a return to faith-based teaching in a nation’s schools should read Adam Smith’s essay in respect of the history of astronomy. Their predecessors who hounded Galileo should be a stark reminder that religious beliefs about the material world they live in are not based on science, but on faith, which can be fundamentally wrong, as science continues to test reality with the process of disproving hypotheses about reality. There is no way you can test an article of faith; you can test every scientific statement, and nothing is lost be one hypothesis being disproved and replaced with another (except, perhaps, the feelings of those who turn an hypothesis into an article of faith and act like it is ‘must be true’ because they believe it to be true).

As Brad puts it:

“science, is the study of the observable, … religion, the invention of the invisible.”

Visible Improvements Beat Invisible Hand Metaphors

It is unfortunate that when someone is arguing a good case for something that Adam Smith would have been a sympathetic supporter, that the author of the excellent ideas quotes from Smith incorrectly. This creates a small dilemma for Lost Legacy:

Should we let the incorrect attribution to Smith go by without comments, or should we treat it in exactly the same way as we would if the author had been arguing for non-Smithian ideas?
The best way to help address the dilemma is to present the case and let you decide for yourself. My answer is given in what I say below.

I refer to an article in the Financial Express, Mumbai, India, 23 August: “Let all professional colleges set own fee structures: institutional subsidy can be given to those who cannot afford” by Parth J Shah, President, Centre for Civil Society, Delhi.

In the course of his argument for the right of colleges to charge appropriate fees, and not to be told what fees to charge by government, which a recent court case in India has decided in favour of the freedom of colleges to charge, the author says:

“The power of Adam Smith’s ‘Invisible Hand’ is finally understood. A proper framework rules of the game is necessary for the Invisible Hand to work. As Smith demonstrated, the institutions of private property and free competition are sufficient to align individuals pursuit of self-interest with social interest. Once fair and transparent rules are instituted, the Invisible Hand would work in the education sector also.”

Now, as regular readers will know that is not what Adam Smith said in relation to the invisible hand. He meant no general statement about markets, or self interest, or even that the metaphor of the invisible hand applied in all situations.

The metaphor of the invisible hand was used by Smith only three times (he took it from Shakespeare: Macbeth: Act 3, scene 2: ‘thy bloody and invisible hand’). His first use was in reference to pagan superstition (the ‘invisible hand of Jupiter’, the pagan god, Jove, not the planet); his second was in relation to the Feudal Lords being led by an invisible to supply their retainers and serfs, upon which their power rested, in roughly the same proportion to what they would have received from their own plots of land if they had had any from the land being divided equally; and lastly, in the preference of traders and manufacturers being led to locate their business locally rather than abroad, which led to the faster growth of national income.

In no case were these uses directed at markets, or at the self interest of individuals always being benign; it could lead to malign outcomes too, as when ‘merchants and manufacturers’ were led by their self interest to erect monopolies, impose restrictions and raise monopoly prices against consumers.

Smith believed that he best antidote to monopoly price fixing is not government regulations and interference in pricing decisions, but legislation to promote competition. Hence, if a college charges higher fees than another (neither being subsidized) than it has to produce a better quality of education to continue in business.

That Parth J Shah understands this is clear from his article. He should stick to making that point and not bringing in the invisible hand which refers to something else.

In my first teaching job on leaving University as an economics graduate was in a college which among other things delivered a non-degree course, the Diploma in Management Studies (DMS). The state fixed course fees. The DMS programme in the region was set at a low fee of few pounds per term, and it was a very popular programme. The college I taught at raised the DMS fee to £30 a term (with permission from the authorities who took the view that the College was going to find no takers when they could get the DMS course elsewhere at a third of the price).

The outcome? The College soon had the largest DMS programme in the region, with attendees from the whole region and not just from the local town. Why? Quality counts. It had fulltime teachers on the programme; it brought in guest lecturers from regional employers; it had clear rooms and proper chairs and desks; and carpets on the floors, with pictures on the walls. And the large surpluses earned from the courses went to funding other courses, and, eventually, the rent of a large building with large grounds that was furnished to a high standard. Most of the other DMS courses at low fees at other colleges continued.

Allowing local colleges to set their own fees, arrange their own scholarships and bursaries, and to compete on quality would do wonders for college education in India. It only requires the freedom to do so; no invisible hand is needed. Just visible good marketing sense, without unnecessary government interference.

That way, students, and their employers, signal what they approve of and poor schools go out of business - or, better still, improve themselves without requiring money from taxpayers.

William Wallace and Adam Smith

In a spirited piece, “Scotland: Seven Centuries After William Wallace” by Lawrence W. Reed, in Mackinac Centre for Public Policy Michigan 23 August, about aspects of Scottish history, heavily influenced by “Braveheart, the film, the author links his theme to Adam Smith and David Hume, and exhibits more than a trifle of poetic licence.

Lawrence Reed writes: “Wallaceite rugged individualism was apparent in the ideas of the Scottish Enlightenment, which produced Adam Smith, David Hume and other 18th century thinkers committed to ideas of limited government, self-reliance, freer markets and personal freedom.”

Stirring stuff indeed. What he attributes to Smith and Hume is correct but whether these ideas meant the same to William Wallace and the men he worked with and against is not so clear.

Never forget that Scotland was a fractious clan society at the time (13th century), with bitter feuds and outrageous betrayals on a grand scale, and living standards to match. A night out in the open near winter in the Highlands would soon cure romantic notions of a happy playground for neighbourly clansmen and their families, not shown in the film.

Adam Smith regarded the Highlands and their communities as backward savages in the 18th century. He opposed Jacobites and their tendency to rebellion against the union of Scotland with England, as had his father during the fateful shenanigans of the dissolution to the Scottish Parliament in 1707 (where gold and trinkets played a larger role in securing the vote than did stirring beliefs in freedom, as did in Wallace’s days in his dastardly betrayal to the English King by fellow Scots).

On the 1745 rebellion he noted that several thousand

"naked and unarmed highlanders took possession of the improved parts of this country without any opposition from the unwarlike inhabitants. The penetrated into England and alarmed the whole nation, and had they not been opposed by standing army they would have seized the throne with little difficulty. 200 yeas ago such an attempt would have roused the spirit of the nation. Our ancestors were brave and warlike, their minds were not enervated by cultivating arts and commerce, and they were ready with spirit and vigour to resist the most formidable foe.” (Lectures in Jurisprudence, 540-41)

It is clear which Scotland Smith preferred to live in, though like all Scots he respected the figures of the past. He just didn’t think there was any role for them in a modern world. Nor did David Hume, a gentle man in all things.

Addition to the Literary Edinburgh tour notice this week-end:

A correspondent has reminded me that Adam Smith was critical of the design of David Hume’s tomb, for which David Hume had left £100 in his will for its design (by Robert Adam, the still famous architect with buildings in Edinburgh and London), and for its construction. According to Ernest C. Mossner, Hume’s biographer, Smith commented:

“I don’t like that monument. It is the greatest piece of vanity I ever saw in my firned Hume” (Mossner, 1980 (2nd ed). The Life of David Hume, Clarendon Press, Oxford, p. 438.

Smith’s tomb was also designed by Robert Adam.

Details from: Ross, I. 1995, The Life of Adam Smith, Clarenden Press, Oxford, p 302
(Added 22 August 2005)

Self Command a General Not a Male Only Virtue

Another piece from the Scotsman (no, I do not have any shares in The Scotsman, though I admire its editorial lines on the economy, public and private, and on general political issues). This time it is on that age-old debate about women versus male influences on behaviour. Kirsty Milne’s article is occasioned by the recent death of a popular woman politician, Mo Mowlam, aged 55. My interest is in her reference to David Hume and Adam Smith:

“For we have been here before. The 18th century experienced a vogue for "sympathy" or fellow-feeling, explored by Scottish Enlightenment thinkers such as David Hume and Adam Smith. The smash hit of 1771 was The Man of Feeling, by the Edinburgh lawyer Hector Mackenzie, featuring a male hero whose sensitivity was attested by frequent bouts of tears. The fashion produced great uneasiness, with calls for a return to Roman or Spartan self-denial and self-command. The two sisters in Jane Austen's Sense and Sensibility, one spontaneously emotional, the other prudent and careful, play out this tension in fictional form.”

Yes, one could refer to Scottish Enlightenment philosophers, Hume and Smith (why not Francis Hutcheson too?) as being interested in ‘human sympathy’ (though it was hardly a general ‘vogue’). Smith was interested in what caused virtues to be practised and why they were applauded. (See my blog piece on Adam Smith’s Philosophy, no 1, earlier this month). But Kirsty Milne goes on to speak of a counter-reaction:

“The fashion produced great uneasiness, with calls for a return to Roman or Spartan self-denial and self-command.”

This is strange. Smith always included the Stoic virtue of self-command in his set of moral sentiments. He saw no contradiction between sympathy (through the Impartial Spectator) and self-command (which he praises in “Moral Sentiments” in several places). Adam Ferguson, among others, tended to lean towards worrying about martial virtues and their decline in a commercial society (he was from close to the Highlands and served as Chaplain to the Black Watch for many years before becoming an academic), but this did not appeal to Adam Smith or David Hume.

I think the counter-poising of feminine and male psychology (as discussed in the rest of her article over a kafuffle among John Buerk and the usual suspects in journalism) is a harmless source for a few paragraphs, but ought not to be taken too seriously.

Still we can all agree on the loss of the decent Mo Mowlam to public life.

Take a Walk in Adam's Footsteps

I am often asked by correspondents and students intending to visit Edinburgh for the first time, what should they look for and where should they look for it. I always recommend a visit to the grave of Adam Smith, though with some reticence as it has been sorely neglected over the years, and perhaps a look at the Panmure House, off the High Street, where he lived with his mother and his cousin in his last years (all three died there).

There is talk of the grave site being cleaned up and of a statue to Adam Smith being erected and sited opposite where he worked (uselessly) as a Commissioner of Customs. The money for cleaning the grave site has been offered by a private person and it is going the rounds in the usual bureaucratic labyrinth. The statue is under the careful management of the Adam Smith Institute (www.adamsmith.org) who are seeking donations for its cost and upkeep. You might also wish to read their daily blog: (www.adamsmith.org/blog)

However, in today’s “Scotland on Sunday” (part of the Scotsman group), there is a feature announcing publication of a book on the local scene in respect of many famous writers who have worked here (The Literary Traveller in Edinburgh by Allan Foster, Mainstream Publishing, £12.99 www.mainstreampublishing.com).

I have extracted some short entries of those associated with Adam Smith to give you a flavour of a short tour you could undertake, all within walking distance. Purchase the book; a good read. Allan Foster knows his literary Edinburgh and is a fine writer too.

1 ROBERT BURNS Lady Stairs Close (was Baxter's Close)
THE most celebrated of Scottish poets. Following the success of the first edition of his poems in July 1786, the Kilmarnock edition of Poems Chiefly in the Scottish Dialect, Burns was eager to return to print as soon as possible. But the Kilmarnock printer insisted on full payment in advance. Unable to pay, he tried for a second edition in Edinburgh, living in Baxter's Close, off Lawnmarket. In his pocket Burns carried a sheaf of introductory letters from the Masonic brothers back in Ayrshire, and within a week, doors opened and his star began to rise.

[Smith and Burns met at meetings of the Masonic lodge in Edinburgh. Burns read Smith's "Moral Sentiments" and it inspired his poem To A Louse].

2 DAVID HUME Riddle's Court (was Land), 322 High Street
SCOTTISH philosopher, historian and political thinker's first permanent Edinburgh home. It was in this house that Hume wrote his Political Discourses (1752) and started on his monumental History of England (5 volumes, 1754-62) and An Enquiry Concerning Human Understanding (1748). In 1753, he moved to Jack's Land, now renumbered 229 Canongate, where he lived for nine years, and where he completed his History. He lived out his life as a man of letters on the corner of St Andrew Square. He is buried in Old Calton Burial Ground, Waterloo Place.

[Smith and Hume were close friends and correspondents from 1749-1776, when Hume died.]

3 DR JOHNSON Boyd's Inn (now Entry), Canongate
THE point at which Dr Johnson arrived in Edinburgh in 1773. On Saturday, August 14, 1773, James Boswell received a note at his house at 501 James Court, off the Lawnmarket, that Dr Samuel Johnson had arrived at Boyd's Inn at the head of the Canongate. Johnson had come to Edinburgh to begin his tour of Scotland and the Hebrides, a journey which would eventually produce two classic works: Johnson's A Journey to the Western Islands of Scotland (1775) and Boswell's Journal of a Tour to the Hebrides (1785).

[Smith and Johnson met but never got on well together; Smith had critcised Johnson's dictionary in the Edinburgh Review in 1755; James Boswll attended a series of Smith's Moral Philosophy lectures at the University of Glasgow and tried to reconcile Smith and Johnson over the years.]

4 CANONGATE KIRKYARD Grave of Adam Smith
ADAM Smith (1723-90), Scottish philosopher and economist. Best known for his influential book The Wealth of Nations. Born Kirkcaldy, Fife, he is regarded as the world's first political economist.

[Don't miss a visit Smith's residence in Panmure Court, off the High Street, a couple of hundred yards from where he is buried.]

14 SIR WALTER SCOTT AND ROBERT BURNS Sciennes Hill House, Sciennes House Place
FIRST and only meeting of Walter Scott and Robert Burns. Scott met Burns only once in his life: when he was a lad of 15 in 1786-7, here, the residence of philosopher and historian Adam Ferguson. A plaque on the restored remains of the mid-18th-century Sciennes Hill House (aka Sciennes Hall) commemorates it. Partly demolished in 1868, it is the back of the original house that faces the street today, and the modified front faces the rear. Originally, it was the home of Robert Biggar, who lost his fortune after investing in the Darien Scheme.

[Robert Burns as above. Adam Ferguson had a rocky relationship with Adam Smith; he was also a friend of David Hume. Ferguson and Smith socialised over the years, on and off, about what is not clear, though it may be to do with accusations from Ferguson that Smith had 'borrowed' his ideas from others (see the appendix in 'Adam Smith's Lost Legacy'). Ferguson set the differences aside when Smith was dying and attended him in his last days.]

There are Regulations and Regulations: some help, others hinder

Adam Smith’s name is dragged into debates on all manner of issues, not always to good purpose. In today’s The Financial Express, 21 August 2005, in Daka, Bangladesh, is a clear example of an incorrect use of his name for a purpose to which he may not have been happy to be associated. Morgan Witzel writes in defence of regulations introduced by governments on business. He begins by citing Adam Smith’s defence of the Cromwellian ‘Navigation Acts’ in “Wealth of Nations”:

“Why red tape should not be dismissed as a company killer”
By Morgen Witzel

“Even Adam Smith, whose Wealth of Nations is regarded as the gospel of free markets, conceded that some regulation may be necessary. Writing in 1776, he supported the retention of the navigation acts, which barred foreign-registered vessels from landing cargoes in British ports, as he felt that the British merchant marine required protection; repealing the acts would allow British shipping companies to be undercut by foreign competitors.”

Some errors amidst the facts cited. I will ignore the usual hyperbole about “Wealth of Nations” being a “gospel of free trade” (historical curiosity: why so many allusions to ‘gospels’, ‘high priests’ and ‘disciples’ in reference to Adam Smith?) and move on to eagerly endorse the view that Adam Smith was not opposed to State regulations – he did not have to ‘concede’ this view – it was central to his approach.

Smith in Book V of “Wealth of Nations” favoured state investment in defence (the ‘first duty of government’); justice (without justice society would ‘crumble to atoms’); public works for projects beyond private finance (roads, canals, harbours and bridges); education of youth (a school in every village) and health (eradication of loathsome diseases). Given the scale of expenditure required to have met this public spending programme, Smith was not automatically against large scale government activity. He was not an ideologue for ‘free markets’ and did not advocate laissez faire.

Morgen Witzel’s reference to the Navigation Acts needs clarifying. Britain is an island not a continent. The Navigation Acts, while using commerce as the vehicle for implementing them, were more to do with the defence of Britain (or, rather, England originally from Cromwell, mid-17th century, to the Act of Union between England and Scotland, 1707). Britain’s overseas trade required shipping and shipping required the instruments of defence, such as ships and, crucially, experienced seamen, lots of them, who could be mobilised in times of war.

Throughout the 17th and 18th centuries Britain fought several wars and the Navigation Acts provided the necessary naval resources for Britain to prevail. Now, I do not doubt for a moment that commercial interests also saw a gain for themselves in applying the Navigation Acts with vigour. It gave them a monopoly of sea trade to and from Britain. And like all commercial monopolies this diverted income to sea commerce at some expense to other home trades, and of course consumers.

Its economic cost to the UK was to ‘buy foreign goods dearer and sell domestic goods cheaper’. Smith recognised this and stated: ‘Defence is of much more importance than opulence’ (“Wealth of Nations”, Book IV.ii.30: 464-5). The ‘protection’ that Smith considered British shipping to need was not ‘trade protection’ as Morgen Witzel suggests; it was military protection (against the Dutch at the time). He did not endorse the Navigation Acts to develop the British economy; it was to survive if Britain was blockaded by a superior naval force.

Smith also favoured government regulations in the Mint, the Post Office, Assay services and Hallmarks for gold and silver; and such like.

Morgen Witzel writes:

“Much regulation is designed to protect business, not to crush it. Regulations and laws against corruption, restrictions on the formation of cartels and monopolies, regulations that require companies to deal fairly and honestly with their customers and employees, have the intent of ensuring fair competition and preventing unethical behaviour.”

Wrapping up such a list is commendable but as I am sure businesses in Bangladesh (and India and Pakistan) well know, the proliferation of regulations, permissions, licences, endorsements, official stamps and hosts of petty paperwork, common in these countries is neither benign to business (they add to costs, not revenues) nor do they prevent unethical behaviour’. Quite the reverse in the latter case. Wherever they exist they promote corruption, on a wide scale and at all levels. If you seriously wish to reduce corruption and unethical conduct, scrap at a stroke all these petty permissions, collect all the rubber stamps in and burn them, abandon all licences and the need for the endorsement of officials. These are the keys to private bank accounts for those tempted (often by low official pay) to become informal tax collectors for themselves.

Lastly, advice that should not be followed:

“The European Union's information and consultation directive, which comes into force this year, requires companies to consult their employees formally on a broad range of issues ranging from pay and conditions to strategic decisions.”

This is the antipathy of what Smith would advise. It is the European Union at its worst. Entrepreneurs do not need such regulations in Europe and neither do they in Bangladesh. Think of the opportunities for delaying decisions until managements ‘incentivise’ employees so that they can proceed with their ‘strategic decisions’!

Good regulations, yes; bad regulations, no.

Smith, Keynes and Greenspan

From today’s “Detroit News” a piece praising Adam Smith’s ideas (excellent) but gets part of them upside down (not so good). The intentions of the author are commendable, but as we know from the law of unintended consequences, things happen ‘betwixt cup and lip’.

“America benefits from the wisdom of Adam Smith” By Thomas Bray, The Detroit News, Sunday, August 21, 2005

Thomas Bray writes:

“… last February, no less than Alan Greenspan paid a remarkable homage to Adam Smith in a lecture in Kirkaldy, Scotland, Smith's birthplace.

"Emperors and armies come and go," Greenspan noted, "but unless they leave new ideas in their wake, they are of passing historic consequence. The short list of intellectuals who have materially advanced the betterment of civilization unquestionably includes Adam Smith."
So far so good, indeed, much better than good, excellent, full marks and could not be improved, for Adam Smith would be in any ‘short leet’ (as we say in Scotland) of those who have advanced civilized values for the betterment of millions."

But then, calamity. That old problem that American academics do not seem able to overcome, the invisible hand re-appears and gets completely mixed up with self-interest in a manner that Smith never said, never meant and never intended.

Thomas Bray continues:

“Smith argued that the "invisible hand" of self-interest, if allowed to work, would promote the public good by leading individuals to invent new products and processes, employ more people and steadily grow more productive. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," Smith famously asserted."

The quotation is correct – Smith did famously assert it, but not quite as Thomas puts it. As for the ‘invisible hand’, the metaphor, used sparingly by Smith (only once in “Wealth of Nations”)and not as a general rule in respect of self interest, which, as Smith was at pains to point out could and did lead ‘merchants and manufacturers’ into the self-interested economic crimes of monopoly, restrictions on supply and high prices to earn high profits at the consumers’ expense, and, therefore, cannot be made to ‘assert’ what Smith did not say.

The self interest of the ‘butcher, the brewer and the baker’ leads them to prepare our supplies for dinner, but that is only part of the equation. There is our self interest too. And Smith’s quotation in context is not saying that that is the end of the matter – it is only the beginning. ‘Self love is insufficient’, said Smith. The mechanism for making it sufficient is found in his other famous quote: the ‘propensity to truck, barter and exchange.’ The alignment of the self interest of the parties to a transaction comes about through their bargaining: what they give up to get what they want.

Smith explicitly cautions readers not to rely on explaining why it is the readers’ self interest for the ‘butcher, the brewer and the baker’ to supply readers with their dinners. That would never do in a Smithian market: he exhorts readers to explain to the ‘butcher, the brewer and the baker’ why it is their self interest to supply readers with their dinners. And the device for mediating these conflicting self interests (readers preferring lower prices for their dinners and the ‘butcher, brewer and baker’ preferring higher prices in exchange for meat, beer and bread) is bargaining over prices, or the price system.

When bargaining results in an exchange of money for dinners the self interests of the parties are met and each party to the transaction has voluntarily adjusted their offer prices and supply prices to the identical price. If they left it to their own self interest they would never come to a deal. Bargaining mediates the discrepancies between the prices preferred by buyers and sellers. ‘Self-love is insufficient’ to do so.

Thomas Bray concludes:

“Nonetheless, intellectuals and politicians forgot about Smith. They rushed to embrace Keynesian theory, whose near-mystical complexities allowed them to believe government could stimulate the economy to even higher performance. Alas, most of their imagined improvements turned out to have counterproductive long-term effects. As a result, Smith is getting a fresh hearing, as the Greenspan lecture suggests.”

I was an economics student during the high-tide of Keynesian economic theory (though I did not find it ‘near mystical’; just unworkable in a full-employment economy because it led to inflation). Bray is right though: Keynesian economics as interpreted by politicians led to it being abandoned.

My concern is that if ‘Smith is getting a fresh hearing’, which version of Adam Smith is being listened to: what those who purloined his legacy say he advocated (the nonsense of the laissez faire version) or what he actually wrote about and advocated in “Wealth of Nations”?

Hell Lost its Bite; Heaven its Lustre

“God before and after Darwin”

Before Darwin shows why he was not the first to find a divine watchmaker scientifically and religiously comforting. By Ashton Nichols (August 19, 2005)

Before Darwin: Reconciling God with Nature. Keith Thomson. New Haven, Conn.: Yale University Press, 2005. 314 pages. $27.00 hardback.

You will already know that there is a acrimonious ‘debate’ (using ‘debate’ in its loosest sense) in progress, if that is the right word for a subject that is long past its best days, which were already closing down when Adam Smith, David Hume and others had to work under the ever-present threat of persecution by zealots – if an idea is enforced by vigilantes through intimidation and tyranny, its best days are nearly done and are prelude to its last days.

The contestants, Intelligent Design (a.k.a. creationism) versus Evolution, are at it all over the USA, and possibly Australia, if it is true to form; a minority of impressionable Ozzies tend to pick up on silly nonsense from across the Pacific. I am not going to get into the kafuffle here; my unpublished, as yet, “Pre-History of the Deal”, which needs a little work on it, takes an evolutionary look at the history of bargaining, so you may guess which side I write on.

However, reading as I do books and reviews of books outside of my field of political economy, from The Times Literary Supplement and elsewhere, I occasionally come across gems that link (in the loosest possible sense) indirectly to Adam Smith. One such, is a review by Ashton Nichols of Before Darwin: Reconciling God with Nature by Keith Thomson, New Haven, Conn.: Yale University Press, 2005.

In the review (in Science & Religion) there is a description of Charles Darwin’s status as a ‘synthesiser’, which seems to me an apposite description of the role of Adam Smith and his predecessors, though I believe that Darwin was being overly modest describing himself solely in the vein (and so would Adam Smith if he had done so):

“Charles Darwin is clearly the Copernicus of the modern era. No other scientist (not Einstein or Crick) and no other thinker (not Marx or Freud) comes close to the lasting impact that Darwin has had on our sense of ourselves and our place in the world. At the same time, like many other great scientists before him, Darwin admitted that he had very few original ideas. He was more of a synthesizer, one who brought together the ideas of others and the insights of several centuries into a unified field theory of life: a testable, repeatable set of observable hypotheses which have stood the test of two centuries. Darwin’s ideas and their applications are now virtually transforming our daily lives and the lives of countless living things around us. Think genetically modified food. Think artificial intelligence. Think cloning.”

The reviewer also makes an interesting comment on David Hume, Smith’s close friend (whom he let down badly, in my view, when Hume was dying, the details of which are in “Adam Smith’s Lost Legacy”). It is the best one paragraph summary of David Hume’s views on belief in a Deity (on the same subject that Smith went out of his way to avoid committing to Hume that he would see to it being published after Hume’s death):

“As Thomson reminds us, the Scottish philosopher David Hume literally emptied the churches of England with two simple questions. If we can believe in any being that we cannot see (a dragon, an alien, a God), then surely it is just as easy not to believe in that being? Similarly, miracles in every religious tradition — Christian, Buddhist, or Hindu — resolve themselves into a simple question: is it more likely that the laws of nature (hitherto so absolute and eternal) have been suspended for an instant, or is it more likely that one human being has told a lie? In Hume’s view, the Christian God could not have existed when the Egyptians were worshipping only Ra, or the Greeks were worshipping only Zeus, since all of these monotheistic deities are mental constructs, just as all of the polytheistic gods were. For Hume, Lazarus was resuscitated by a supremely wise doctor and teacher, just as we now resuscitate dying people simply by breathing into their lungs, in countless hospitals every day, whatever religion we practice or do not practice.”

I should say that Thomson, the author of “Before Darwin”, exaggerates about Hume’ emptying the Churches’, but we get the idea – over time, others asked the same questions about ‘miracles’ and the rest, and thus began the decline in threats of Hell’s fire and promises of Heaven, until they lost their bite.

Postscript: I should have mentioned when commenting on Smith's 'synthesising', that Professor Salim Rashid (University of Illinois) would not agree with my assessment. He argues that Adam Smith was an outright plagiarist (see Salim Rashid: "The Myth of Adam Smith", Edward Elgar, 1998). Hence, in his view, Smith went beyond synthesising by not acknowledging his intellectual debts to several 17th and 18th-century pamphleteers. This is not the place to pursue this issue, but I believe Salim Rashid's assessment is problematical and he exaggerates the case. I assess these issues in the book on Adam Smith I am writing at present for Palgrave's Great Thinkers in Economics series. Needless to say, perhaps, Professor Rashid is a very knowledgeable contributor to studies of Adam Smith's work and his views require a proper consideration, and an answer if they are not accepted.

Benefits of Outsourcing and the Myopic Visionaries

From Budapest (apologies - the source was accidentally deleted)

Matthew Higginson in an article “Knowing why, how, when and what to outsource”, quotes economists’, Mary Amiti and Shang-Jin Wei, who argue in a 2004 IMF paper on outsourcing, that there is nothing new in the concept:

“The growing outsourcing of services in industrial countries is simply a reflection of the benefits from the greater division of labor and trade that have been described for manufactured goods since the time of Adam Smith and David Ricardo.”

The main difference is that the division of labour through outsourcing is now encompassing services, which labour sees as moving jobs from a higher wage economy to lower wage economies. The idea that no work should be outsourced to a lower wage economy until wages in that economy are comparable to the wages of the higher wage economy, plus all the attendant add-ons in health and safety regulations, health and pension benefits, and such like, is at best a hopeless utopian requirement and at worst a reactionary anti-development stance. That trade unions are among those clamouring for such draconian measures should not surprise anybody because unions exist to enhance the wages and conditions of their members only and their veneer of international solidarity often runs shallow when their members’ interests conflict with the interests of foreigners.

Of great relevance in this debate, the classic paper by Ronald Coase, “The Nature of the Firm”, 1937, is probably the best source for understanding it. Work remains inside the firm while the transaction costs of its organisation remains lower within the organisation than the costs of the acquisition of goods or services outside the firm from markets. Suppliers of outsourced services can achieve economies from supplying such services to several customers, a market which is unreachable for in-house departments whose expenditures, capital and labour, are spread heavily on the organisation’s local requirements.

When a firm finds that the costs of an outsourced service (wages, management plus the outsourced form’s profit element) exceeds the internal costs (wages, overheads, transaction costs), the outsourcing option becomes viable. The difference in wage rates may only be one factor in an outsourcing decision, and may not be a permanent factor, as wages in lower wage sectors and countries tend to converge, particularly when the labour moves into highly skilled and better trained jobs. Outsourcing between firms in the same economy is already a feature of the division of labour. Specialist firms gain from economies of scale (breadth and depth) and wage differentials may be non-existent.

Outsourcing between countries with different current levels of development is part of the process of development. As the developing country receives high-tech outsourced jobs, its lower wage levels also begin to rise, which raises its ability to pay for imports from other economies, including from developing and developed countries.

These are benefits of ‘globalisation’, which affluent demonstrators march against; it seems the ‘myopic visionaries’ are always with us.

Pessimism from the Guardian

Larry Elliott, Economics Editor of The Guardian, Thursday August 18, 2005 writes in “Edwardian summer: welcome to the second age of globalisation, and the labour practices of Victorian mill owners’:

“History does not always repeat itself. It may be different this time, with the second age of globalisation avoiding the pitfalls of the first. There are those who point out, rightly, that modern industrial capitalism has proved mightily resilient these past 250 years, and that a sign of the enduring strength of the system has been the way it has apparently shrugged off everything - a stock market crash, 9/11, rising oil prices - that has been thrown at it in the half decade since the millennium. Even so, there are at least three reasons for concern. First, we have been here before. In terms of political economy, the first era of globalisation mirrored our own. There was a belief in unfettered capital flows, in free trade and in the power of the market. It was a time of massive income inequality and unprecedented migration. Eventually, though, there was a backlash, manifested in a struggle between free traders and protectionists, and in rising labour militancy.”

In what I suppose is a typical apocalyptic tone from Larry Elliot (he does write for the Guardian after all) we really get a miniscule listing of economic problems to frighten us into panic. A graduate in history from Cambridge (what are they teaching there – certainly not a sense of balance from weighing the evidence against the scale of the alleged problem?) he thinks 250 years of capitalism is fairly tested for its resilience by a ‘stock market crash’ (these have happened on similar and larger scales to the most recent episode many times before – not even 1929 did lasting damage); by the ubiquitous ‘9/11’ – please, let’s keep our perspective here – two large buildings were destroyed and cost 3,000 lives; meanwhile tens of thousands, sometimes hundreds of thousands, die in earthquakes and other ‘natural’ disasters, without destroying the world’s economy; and now, pause for trumpets, we have a rise in oil prices to $65 a barrel and rising still. It would have to rise to twice that to equal the great OPEC hike of the 70s, and that did not destroy the world economy either.

The last ‘age of globalisation’ was accompanied by ‘a struggle between free traders and protectionists’ and the entire history of commerce in the modern era always has been accompanied by the ‘titanic’ struggle between these two polar opposites. Adam Smith joined battle in the 18th century against what he called ‘mercantile political economy’, a battle that went on throughout the 19th and 20th centuries; so its continuation into the 21st (and probably the 2nd too), should not surprise anyone.

For those interested, the clearest expression of mercantile political economy, outside “Wealth of Nations” is found in Frederich List’s “The National System of Political Economy” (1841), except that List promoted mercantile policies, allied to State power, while Smith opposed them. Reading the history of economic thought calms the nerves of those who come at it as if mercantile versus free trade is new phenomenon. It is not new and would not ‘frighten the French’, as my mother-in-law used to describe anything (not much)that shocked her.

Larry Elliot continues:

“Second, the world is traditionally at its most fragile at times when the global balance of power is in flux. By the end of the 19th century, Britain's role as the hegemonic power was being challenged by the rise of the United States, Germany and Japan while the Ottoman and Hapsburg empires were clearly in rapid decline. Looking ahead from 2005, it is clear that over the next two or three decades, both China and India - which together account for almost half the world's population - will flex their muscles.”

His first sentence is very true, as I was discussing here earlier this month in respect of a discussion that took in Organski and Kugler’s thesis (‘The War Ledger’, 1980, University of Chicago Press). It is his last sentence that caught my attention; good old panic mongering of the kind fuelling the protectionist drum beats (still distant) in the USA.

Note the vague threat: “both China and India - which together account for almost half the world's population - will flex their muscles.” Yes? But what precisely will they do? Invade America? Each other? Or who? And to what ends?

They are now in a trap of their own making. Being nuclear powers they have become entangled in the same stalemate we had in the Cold War. Unable to exercise their military power against a nuclear power they have to find a way of living with other nuclear powers. The alternative is too fraught to contemplate.

I expect they will become more independent in their pronouncements at the United Nations, but they have done that for years to no effect. Remember the ‘non-aligned’ movement, which was always an inconvenience, but nothing more, during the Cold War to the NATO countries? So what then is the threat from them of the next ‘two or three decades’.

Larry Elliot does not say. We are left to fill in the worst scenario that our mood of panic induces. I do not intend to lose any sleep over it, and neither should you.