Friday, August 19, 2005

Two Quibbles and a Recommendation

The Royal Gazette, Bermuda, 18 August 2005
Robin Stewart:

“Economies work best when people are allowed to get on with their lives, and in the wonderful invisible hand metaphor of Adam Smith, the motivating force of self-interest creates an unintended consequence of prosperity. That metaphor is the most famous example of illustrating that there is a marvellous economic order that operates efficiently without the designing hand of authority.”

In this paragraph in Robin Stewart’s Opinion article in the Royal Gazette, Bermuda, there is a great deal of good sense and in its basic contention there is historical accuracy. I agree with almost everything in the paper. Stewart’s account of the folly of Government ‘planning’ is so good it deserves wide circulation.

Hence, in quibbling with an aspect of it, I am not criticising Robin Stewart’s basic contention that markets, when allowed to work properly are a great boon to human civilisation. But if we let certain lapses along under the rationale that ‘we know what he means’ or ‘his main point is correct’, we join the drift away from Adam Smith’s legacy that ends in endorsing the drift that became a wholesale distortion of what Smith actually said. In short, we join the abusers of Adam Smith’s legacy.

At the risk therefore of being dismissed as a pedant or someone who has ‘lost the Smithian plot’ (because what Stewart is arguing against is far worse than the distortion of Smith) I shall plunge in with two points, one my usual attack on the misuse of Smith’s (or rather Shakespeare’s; Macbeth, 3.2: ‘they bloody and invisible hand’) metaphor of the ‘invisible hand’, and the other the problematic ‘quotation’ from a paper by Smith in 1755, but which unfortunately was destroyed before it could be examined.

First, the invisible hand: Stewart presents it accurately as an ‘unintended consequence’ of human motivation. That is how Smith used it in “Wealth of Nations” (page 456), in his case in respect of traders preferring to trade locally, where they could manage their investments, rather than abroad. This had the effect of raising national income faster than if they sent their capital abroad where it raised the foreign country’s national income. Note, this had nothing to do with markets: it was about the growth of national income, which was the purpose of his inquiry.

But then Stewart, in common with many other modern commentators, shifts the metaphor from annual national income due to the location of the trader’s investment, to that of “the market” generally. But that was not Smith’s point – for wherever the investment was located it would have the same effect of raising national income (all matters considered equal), but then different sets of people would benefit – either local people or foreign people. Remember. His book was about the wealth of nations, and not the wealth of the international community.

The twin sources of prosperity were the division of labour and the propensity to ‘truck, barter and exchange’ one thing for another. This served the absolute dependence of all on all, which was the driving force of markets.

No need for an invisible hand, sometimes called, in my view wrongly, ‘miraculous’, (there is a school of thought critical of Smith which accuses him of using a religious mysticism in the metaphor, something he never intended because he never used I in relation to markets). Stewart comes close to this adulation of a perfectly understandable operation when he calls it a ‘marvellous economic order’. There is nothing mysterious about markets; their functions are well understood.

Stewart’s second point of contention is slightly more complicated and would take an essay to thoroughly cover. Its background forms an appendix in my “Adam Smith’s Lost Legacy” (Palgrave Macmillan 2005) and is too long to cover here.

Robin Stewart writes
:

“At the risk of irritating Mr. Hayward, Adam Smith I believe said it best:"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point are unnatural, and to support themselves are obliged to be oppressive and tyrannical."

However, the problem is that the person (Dugald Stewart – not Robin Stewart!) who read the quote into his celebration speech of the life of Adam Smith over two meetings of the Royal Society of Edinburgh in January and March, 1793, (Dugald Stewart was Smith’s biographer with that long essay speech), unfortunately had the only copy of Smith’s 1755 paper from which the quote was made, and, more unfortunately, Dugald Stewart’s mentally ill son is believed to have burned it, and it not longer exists. There is no recorded case of anybody else reading the paper, nor quoting directly from it. All quotes since have come from Dugald Stewart’s speech.

In scholarly terms we cannot confirm its authenticity, which is a pity. When it is quoted the author should always make clear the status of the speech (‘Adam Smith is believed to have said …’, etc.). It would be wonderful if a complete copy of the 1755 paper, attributed to Smith, could be found and published, the one that Dugald Stewart quotes from was probably the only copy made and was the one read to the Glasgow Club in 1755.

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