From the Department of Not Very Important, but ...

The BBC reports this morning:

“Gordon Brown has been appointed chancellor for the second time.

Best known as Chancellor of the Exchequer, the Fife MP has now been chosen as Scotland's first college chancellor.

He was handed the title by the Adam Smith College, in his constituency of Kirkcaldy and Cowdenbeath.
Mr Brown will attend graduation ceremonies and act as an ambassador for the college locally, nationally and internationally.

College principal Dr Craig Thomson said: "Scotland's colleges are central to the development of a smart, successful future for Scotland.

"The visible support of such a prominent individual as the chancellor is a vote of confidence in the role that we play."

The college was created in August, following the merger of Glenrothes College and Fife College.”

It’s not only good for the College, it is also good for a local MP who is heading to lead the Labour Party as Prime Minister – it cements his already formidable links with his constituency. It’s called covering one’s ass in the unlikely event that someday a potential rival emerges locally to challenge him.

But full marks to the Principal of Adam Smith College for speedily – and craftily – aligning his College interests with such a powerful, and well liked, figure as Gordon Brown.

The BBC staff journalist who compiled this brief report also commented on Adam Smith. The college “was named after the Kirkcaldy-born economist Adam Smith, who lived from 1723 to 1790 … best known for his book The Wealth of Nations, but also published The Theory of Moral Sentiments, regarded as a groundbreaking work on philosophy.”

Good to see Smith’s work linked in this manner (if some of the 20,000 students at Adam Smith college also become aware of these facts, that is good for Smith’s legacy).

Kirkcaldy, situated just across the Firth of Forth from Edinburgh, is adding to the recent, and we hope continuing, stream of interest in Adam Smith as a person, with recent reports here of the Literary Walk in Edinburgh to sites associated with his many years spent in the capital, the commissioning by private subscription of a statue of him to be erected opposite the place where he was a Commissioner of Customs and a few hundred yards from where he lived (Panmure House) and where he was buried (Canongate Church yard).

Most recently, there have been calls for Edinburgh and Scotland to make more in their tourist marketing of the Scottish Enlightenment, in which Adam Smith and his friend David Hume played such prominent roles.

I think something is stirring in terms of Adam Smith studies. If this re-establishes his true legacy, I for one, would be very pleased.

New 'Kid' on the Blog

A new Blog site is open for traffic: "Adam Smith Lives!". It is written by (Sandra Peart) and for those interested in the history of economics thought from an academic and general reader angle.

Teachers of economics would benefit from the subject matter and its interesting snippets of how subjects were treated in the pastwhich would add 'fire' to class discussions and tutorials, and perhaps that favourite in academe, class papers.

Despite its attention grabbing title (I like it) there is a much wider coverage than Adam Smith alone. You will find it at: http://www.adamsmithlives.blogs.com/

In a short while Lost Legacy will link to it (memo to technology department: attend to this requirement asap, please). Adam Smith Lives! also contains some interesting links of other sites interested in the history of economics theme which may appeal to many readers here.

Check it out; bookmark it; and pay attention while you make notes!

Excuse Me, Mr Greenspan, but You are in Error

I do not tackle Alan Greenspan’s mistaken ideas, or rather his popular presentation of them, without considerable hesitation. Greenspan knows far more about running a capitalist economy than I do and I have no wish to invite the derision of colleague economists along the lines of ‘what the hell does Kennedy know that Greenspan doesn’t’? But, if I criticise the likes of Dowd in the comment below this one – more an open goal than a challenge – then I should not duck what I would criticise if anybody of lesser stature than Greenspan said the same things about Adam Smith. “Lost Legacy” exists to contest all manifestations of the corruption of Adam Smith’s legacy no matter from whom they emanate.

I quote from Alan Greenspan’s remarks on “Economic flexibility” to the National Association for Business Economics Annual Meeting, Chicago, Illinois (via satellite) on 27 September 2005:

“In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history.”

Fair enough. The “coincidence” is a fact and that’s all it was, though we know Smith held back publication waiting for news of the military decision to the ‘disturbances’ in the colonies; we also must accept the information from Greenspan that Smith’s prescriptions were followed in the USA (if not in all of the Americas, though Greenspan refers to ‘American leadership’ in much the same way as some refer to “England” when they mean “Britain”).

“With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behaviour drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work.”

Oh dear. Smith did not postulate anything about the invisible hand (a metaphor he borrowed from Shakespeare (Macbeth, 3:2: “the bloody and invisible hand” – in which Shakespeare managed to libel the real King Macbeth who was well aware of the benefits to his kingdom of trade) and competitive behaviour. His references – only three in all of his Works - one only in “Wealth of Nations” - did not deal with markets at all and neither did the other two references in the “History of Astronomy” and “Moral Sentiments” (Mr Greenspan’s acolytes can look up the references and show them to their boss if he should doubt it).

It may be that “competitive behaviour drove an economy's resources toward their fullest and most efficient use”, but this had nothing to with visible or invisible hands. It was how markets worked and these were not mysterious, miraculous or amazing at all. Smith, and others before and since, knew about how markets work and did not, and do not, have to resort to pagan superstition to explain them.

“[Keynes] argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes.”

Two quick points. Smith wrote nothing about “full employment”, a strange notion in 18th century Britain, as would have been the concept of “equilibrium”, which is an invention of neo-classical economics, much disputed by the “Austrian” economists. Second, Smith did not have a laissez faire approach (words he never used, though he was familiar with them from his meetings with French Physiocrats in Paris in 1765-66). He chose not to use the words laissez faire at all because he did not agree that self-interest always led to benign results, of which the parable of the “Tragedy of the Commons” should surely teach young economists, and caution older ones against such an assumption, and Smith’s many strictures against monopolising and anti-competitive tendencies, should always remind us of his suspicions as to what they got up when relieved of all constraints as implied in a adopting a foolish policy like laissez faire.

Usually, for some strange and unfathomable reason, laissez faire is put into quotation marks and often hyphenated by modern English speaking economists, though not common in the French language as it is written. It is the simple third person tense of a common verb. Is it some kind of quasi-religious symbolising? Also, whatever Keynesian polices were replacing they had nothing to do with Adam Smith’s legacy.

“Whether by intention or by happenstance, many, if not most, governments in recent decades have been relying more and more on the forces of the marketplace and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances. That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses often have come too late or have been misguided.”

OK. A fair assessment, sticking to what Smith wrote about. But overall, Smith’s presence in these remarks by Alan Greenspan to attendees at the National Association of Business Economists is somewhat controversial. I do not suppose many of the business economists in the audience recognised the controversy as, no doubt, they were brought up to believe more or less the same caricatures of Smith’s contributions, as reported by Greenspan, whose authority silenced any doubts they may have momentarily entertained if any of them had read “Wealth of Nations” and not just relied on what their professors told them, based on what they had learned, in turn, from their professors.

Until the Men of the Night Come for Them

On Znet.com (a radical ‘Marxist’ offering from Wood Hole, Massachusets, USA) Doug Dowd proclaims ‘consumerism’ is a social disease. He also writes nonsense about Adam Smith:

“Not for nothing was the opening chapter of Marx's Capital entitled "Commodities," for commodification is among the defining characteristics of capitalism. First was land and labor; now, everything is a commodity; everything is for sale.

Adam Smith provided the analytical basis for commodification. In his Wealth of Nations (1776). (sic!) He argued that free market competition, warts and all, would take us to "the best of all possible worlds." What he sought to replace was the corrupt and power-drunk mercantilist state of his time; he would be horrified by the corrupt and power-drunk monopoly capitalism of our time.”

Smith never knew the word, nor the phenomenon, “capitalism”. It was not invented as a word until 1858, when Marx was introduced to it.

If the real wages of labour were low in 1820 (asserted later in Dowd's article by his quoting another Marxist), they were even lower in the mid-18th century when Smith wrote. But these low wages were also higher in 1750 than they were in 1700, and, a fact that Dowd does not mention, both life spans and real wages in the USA and Britain continued to rise in the 19th century and the 20th century. Life expectancy in the US is the highest in the world, a factor not unrelated to its economy, “warts and all”.

Smith did not write about “commodification” (whatever that is). He wrote about the re-appearance of commerce following the 1,000 years of the barbarian/feudal interregnum experienced in Western Europe after the Fall or the Roman Empire. He did not write about the ‘best of all possible worlds’, a powerful satirical phrase of Voltaire’s, whom Smith knew personally and admired from his visit to him in Geneva in 1765,from his writings.

Dowd may not be acquainted with Smith’s “Wealth of Nations”, nor have read Karl Marx’s views on the progressive role of capitalism. Indeed, Smith was, perhaps, more critical of “merchants and manufacturers” than Marx was of capitalists.

What Dowd means by Smith arguing for “free-market competition warts and all” is not clear. The phrase “warts and all”, of course, is attributed to Oliver Cromwell – does Dowd just pluck out of a mangled sense of history anything to stick on whomsoever he writes about?

Whatever Smith might feel about the “monopoly capitalism” of our time, “corrupt”, “power-drunk”, or even sober, it would probably be mild compared to his views on those who wish to replace markets by state planning, bureaucratic direction and the inevitable accompanying totalitarianism of the “men of system” (“Moral Sentiments”, 1759, VI.ii.2.17, page 234).

These men, said Smith, are wise in their own conceit and the supposed beauty of their systems, they believe that society is a giant chess board, but they forget that humans are not wooden chess pieces, moved about by the hands of small bands of revolutionary fanatics; they are subject to principles of motion of their own.

If the men of system never realise this until after they seize power, they will find out quick
enough that the ‘masses’ do not share their enthusiasm to obey revolutionary orders, and those among them who do not become suicidal and depressed as they realise this, will forget all they ever proclaimed about the rights of workers as markets, 'warts and all' are replaced by poverty inducing commissars and their gulags. If they protest about this consequence of their revolution, the ‘men of the night’ will arrive to take them away for disposal as ‘ideologically unsound’.

Not By Design

John Allen Paulos (professor of mathematics at Temple University) takes on the Intelligent Design argument in today’s The Philadelphia Inquirer (Philly.com), 28 September in an article, “ID Proponents like designer-less market".

He writes:

“The natural question, discussed first by Adam Smith and later by Friedrich Hayek and Karl Popper among others, is: Who designed this marvel of complexity? Which commissar decreed the number of packets of dental floss for each retail outlet? The answer, of course, is that no economic god designed this system. It emerged and grew by itself. No one argues that all the components of the candy bar distribution system must have been put into place at once, or else there would be no Snickers at the corner store.

So far, so good. What is more than a bit odd, however, is that some of the most ardent opponents of Darwinian evolution - for example, many fundamentalist Christians - are among the most ardent supporters of the free market. They accept the market's complexity without qualm, yet insist the complexity of biological phenomena requires a designer.

They would reject the idea that there is or should be central planning in the economy. They would point out that simple economic exchanges, which are beneficial to people, become entrenched and then gradually modified as they become part of larger systems of exchange, while those that are not beneficial die out. Yet some of these same people refuse to believe natural selection and "blind processes" can lead to biological order arising spontaneously.

There are, of course, quite significant differences and disanalogies between biological systems and economic ones (one being that biology is a much more substantive science than economics), but these shouldn't blind us to their similarities nor mask the obvious analogies.
These analogies prompt two final questions. What would you think of someone who studied economic entities and their interactions in a modern free-market economy and insisted that they were, despite a perfectly reasonable and empirically supported Smithian account of their development, the consequence of some all-powerful, detail-obsessed economic lawgiver? You might deem such a person a conspiracy theorist.”

Comment:

Professor Paulos makes a good case and points out a devastating contradiction in the ID advocates case: they insist on ID for the proteins that create a blood clot but would not wish to tolerate a society in which the State centrally planned (by design) the economy in which they live, if only because they would rightly deny that human agencies could intelligently design how markets work, let alone how they developed historically.

Adam Smith actually made this point several time in his life’s work. He had, what we may justly call, an evolutionary view of how societies developed, from Gatherer-Hunters, through Shepherding and Agriculture and then through to Commerce (“at last”). This was called his Four Stage model of human societal evolution, which I discuss in “Adam Smith’s Lost legacy”, Palgrave Macmillan, 2005, Chapters 18-20).

He actually applied the same evolutionary model to the “Origins of Language”, first published as an essay in 1761 and later as an appendix in the fourth edition of “Moral Sentiments”. It is not difficult to show that languages evolve and are not printed in the mind, complete with nouns, verbs, adjectives and syntax by some agency called ID. The sheer proliferation of languages and their changes over time (tracked in all literate societies), their divergences (English and American; even the English of Chaucer’s day compared to Elizabethan English and ‘modern’ English) and their ‘borrowings’, show linguistic evolution before our eyes, or more correctly our ears.

Smith also applied the same model to “Moral Sentiments” – the evolution of social harmony by the adoption of appropriate behaviours (i.e., ‘appropriate’ to the group, not necessarily to some standard of prescriptive virtues) – and showed that nobody designed this, though many influenced it until it accreted into a set of norms acceptable to that group of humans. I also discuss this evolutionary moral process in “Adam Smith’s Lost legacy”, Palgrave Macmillan, 2005, Chapters 9 -14).

“Wealth of Nations” completed Smith’s evolutionary model in the growth of the economy, from the simple division of labour through to more and more complex, unplanned, undesigned, and uncontrolled deeper divisions of labour that we have come to know in the 21st century. There is nothing mysterious about the market mechanism, nothing ‘miraculous’ and nothing extraordinary. We have a good idea of how it evolved and how it works. There are, of course, no invisible hands! Humans operate it, but no one of them designed it; and nor did any invisible designer (what a throw back that is paganism for anybody, especially a Christian, to believe that!).

We do know that when allowed to operate, without design, it produces results unmatched by any alternatives.

A Misuse of Adam Smith's Work

In Alternet, San Francisco, Sean Gonsalves, of the Cape Cod Times has a piece syndicated, about President Bush and the ‘breakdown of government’ in the Katrina emergency. Without wishing to comment on the internal affairs of the USA, I am, however, concerned at the misuse of Adam Smith in Sean Gonsalves’s case.

He writes (in an excellent example of a knock-about columnist at work):

“Tell me that our market morality, with its slavish and idolatrous commitment to ''division of labor'' abstractions, hasn't reached the point where people are human robots unable to do the right thing without first getting an order to act?
Adam Smith, the father of capitalism, warned us about this kind of thing in ''The Wealth of Nations'' - something that laissez-faire free-market cheerleaders conveniently skip over.
Smith recognized that ''the understandings of the greater part of men are necessarily formed by their ordinary employments.''
And, he wrote, ''the man whose life is spent performing a few simple operations...has no occasion to exert his understanding...and generally becomes as stupid and ignorant as it is possible for a human creature to be.''
But Smith, a distinguished moral philosopher (not an economist) by profession, doesn't advise the pull-yourself-up-by-your-own-bootstraps canard.
The ''great body of people'' cannot avoid such mind-numbing effects, Smith wrote, ''unless government takes pains to prevent it.''
Stop the blame game? Sorry, but that doesn't butter the biscuit.”

The division of labour is not an ‘abstraction’ – Gonsalves writes his piece and other people turn it into a printed column and syndicate it.

In the history of the USA there is a strong line of legal precedence about the division of powers (even labour) between what the Federal Government may legally do and what State and local governments may do. Sean Gonsalves should know that. Hence, it is the case that Federal Government is “unable to do the right thing without first getting [or giving] an order to act?”

You can argue that Katrina was such a bad situation that the President should have ignored legal protocol (and, no doubt, the strong advice of his legal counsel apart from his political instincts - he had, after all, been a Governor of a State himself) and gone in over the head of the State Governor and the Mayor of New Orleans. But ‘hard cases make bad law', and given the blood spilled over the contest between State rights and Federal powers, it caused its own paralysis, apart from any cases of incompetence there may have been in those early hours and days. I am not sanguine about the correlation between government and incompetence.

Adam Smith was not the ‘Father of Capitalism’ and never advocated laissez faire. That was the next century, not Smith’s, and so what “laissez-faire free-market cheerleaders conveniently skip over” is not relevant to Gonsalves case against President Bush.

Gonsalves says that Smith recognized that ''the understandings of the greater part of men are necessarily formed by their ordinary employments.'' Indeed, he did say that in “Wealth of Nations” (Book V.i.f.50, pages 781-2) but, er, what has this to do with President Bush (who is certainly not confined in his daily work to “a very few simple operations”, plus his access to scores of advisors)? And the same applies to his gratuitous use of the sentence: ''the man whose life is spent performing a few simple operations...has no occasion to exert his understanding...and generally becomes as stupid and ignorant as it is possible for a human creature to be.''

Gonsalves adds: ‘The ''great body of people'' cannot avoid such mind-numbing effects, Smith wrote, ''unless government takes pains to prevent it.'' Again, what has this to do with the Katrina situation?

The division of labour that Smith wrote about (which was a well known phenomenon long before Smith wrote about it) in “Wealth of Nations” (Book I, Chapter 1) in great detail, refers to a single purpose form of labour, so simplified, that a labourer increase productivity significantly in collusion with others, albeit with the side-effect costs alluded to in the chapter Gonsalves quotes from Book V.

But even here I am not sure Gonsalves uses Smith’s point correctly. Smith was making the case for general elementary education provision for the children of common labourers. The more negative consequences of the division of labour he alludes to in Book V (in contrast to his praise of it in Book I) were the problem that they made young men less suited to the ‘martial’ spirit necessary for the defence of the country. It was this problem that needed government intervention in the form of funding elementary schools (always with some contribution financially from parents).

It had nothing to do with the potential need for government intervention over the heads of State Governors and City Mayors in the case of an emergency. Does Sean Gonsalves realise what he is suggesting when he demands that the US President should march in and take over the powers of a State (which the US President does not have and is unlikely every to get a Congress to accept). The fact that President Bush ignored the UN in the decision to go to war with Iraq is easily explained: there was nothing really that the UN could do to the US – which would veto any resolution to do anything about it at the UN Security Council. But there is plenty that the US Supreme Court (and the opposition democrats, and rival Republicans) could do against the President in such a blatant breach of the US Constitution.

If I had to spell the details out out to Sean Gonsalves (which I doubt), he would have no business being a columnist.

Great New Biographical Article on Adam Smith

The new 2004, 60 volume edition of the Oxford Dictionary of National Biography (DNB) has a great entry on Adam Smith. It is written by Donald Winch and is authoritative, scholarly and comprehensive.

I enjoyed reading every page and recommend it to everybody who wants to read about Smith’s Works, especially “Moral Sentiments” (the best short summary of his moral philosophy I have read for many a year) and “Wealth of Nations” (a cogent report on Smithian economics that corresponds to Smith's intended legacy). Donald Winch summarises Smith’s biographical details and places his contributions in proper perspective, pleasing I am sure to specialist scholars and pleasantly informative to general readers.

Donald Winch is the author of the much cited 1978 authoritative book: Adam Smith's Politics: an essay in histiographical revision, Cambridge University Press.

The problem this is not a cheap purchase. Even with a publisher’s discount it costs £6,750 (email: ged.welford(at)oup.com). Alternatively for £50 + vat (17.5 per cent) you get 3 month’s access to the entire DNB (£195 + vat for 12 months) from www.oxfordonline.com
Go for it if you can.

Last weekend OUP gave 3-days free access from which I looked up Adam Smith and brouse through many others among his contemporaries (nice to see several authors of entires citing my own work on Captains James Cook and William Bligh, two contemporaries of Adam Smith).

Punish those Caught With Their Hands in the Till

Uddin Ifeanyi contributes an opinion piece on “Re-Defining Corruption” in “This Day” (AllAfrica.com) Lagos Nigeria (25 September);.

In it he quotes from “Wealth of Nations” (IV.ii.9. page 456; square brackets indicate minor errors in transcription]:

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally [, indeed,] neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part [it]. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it”.

While Uddin Ifeanyi makes some excellent points in what follows I am not sure that he has completely expunged the error that links what Smith says here about the invisible hand (using Shakespeare’s metaphor from Macbeth: 3.2) with the working of markets. The invisible hand had to do with motivations, not markets, as I have pointed out her on many occasions. Ifeanyi continues:

“Yet, although Adam Smith did not allude to this detail in creating his “invisible hand” metaphor, the market is indeed a peculiar place. Take the “tragedy of the commons” as but one example of the unintended consequence of self-interest’s free play. And what about “enlightened self interest”? Does this not resolve the blind spots on which the tragedy of the commons subsists?”

Noticing the “tragedy of the commons” is an excellent observation by Uddin Ifeanyi of the error of laissez faire economics – market failure is indeed a problem, though it must be said the real tragedy of the commons is caused by the absence of property rights in the “commons”, which would allow a market solution to operate, and is not really a problem of market failure because markets in these cases do not exist to start with.

I disagree that markets are ‘peculiar places’. They are well understood (and were in Adam Smith’s day, too) and there is nothing mysterious (visible or invisible) about how they work – there is a difference between something being worthy of ‘wonder’ and knowing how it happens - See Adam Smith’s ‘Essay on the History of Astonomy’).

Uddin Ifeanyi continues:

“Arguably, the market works best, when relevant information is available to all market participants at the same time. But most times, markets fail - i.e. when voluntary actions within the market generate a negative result that all involved would regret if they knew of it - on the back of an asymmetry of information. Because one party to the sundry transactions that give markets their vitality comes into useful knowledge ahead of his/her counterparties, s/he is able to take lucrative positions to the disadvantage of others. In other words, due to this information failure, markets fail to direct resources to their most highly valued uses.”

The only markets where all participants know the same information simultaneously are those close to theoretical constructs like “perfect markets”. A well-informed shares market with no ‘insider information’, perhaps, might comply, but that is not really the point. Participants in markets in sophisticated economies (and less sophisticated economies that have sophisticated segments in the economy, such as commodity markets) tend to be well informed, if not perfectly well informed. Specialist analysts, data collectors and researchers trade in supplying information for fees to market players. On a less sophisticated level, trade journals, e-mail newsletters, newspapers and other media earn incomes from supplying information. The extent to which players use the information, are aware of it and can react in time will vary. In short, perfect distribution of information at infinite velocity to those who could benefit from it in any market is unlikely.

Uddin Ifeanyi’s main point in the article is to highlight how the defendant’s family treats corruption when a member of it is ‘caught with his/her hands in the till’ (apparently the case in Nigeria):

“Despite the process of transfer of public funds to private hands that corruption usually gives breadth to, the extent to which corrupt practices further the public good is doubtful. For not only does corruption in public office subvert the very foundation of the state by making it less able to discharge its responsibilities. It increases economic inefficiency by exacerbating income inequality.”

Be clear. An imperative of a Smithian market is that the participants obey the law and are subject to justice if they forget that. Corruption is a crime (including using ‘insider information’) and it can never contribute to the public good. Neither can the ‘tragedy of the commons’; the former need the vigilance of the legal authorities and the full rigour of the courts and the latter needs a market in property rights, not exhortations to curb consuming the ‘commons’.

Uddin Ifeanyi is absolutely correct to conclude: “the imperative that they highlight is the very strong need to align the interests of political office holders and their civil servant cadres with that of the voting public. This way, these servants of the state and the people would watch over corporate Nigeria with the “same anxious vigilance” that they watch over their own endeavours.”

I am sure Adam Smith would have agreed with that sentiment. Electors should always watch the conduct of their elected and paid officials with the closest scrutiny. What they say and do should always have public (and family) support for legal remedies for their market transgressions.

Authentic Voice of a Classic Liberal

Razzen Sally, a lecturer at London School of Economics, has contributed an article, “Free Trade: old arguments, new threats” in Bombay’s Financial Express (India). A clearer statement of the viability of free trade for the eradication of poverty by the development of prosperity could not be made.

Congratulations to Razzen Sally for writing such erudite good sense in the Smithian mould, and to Financial Express for publishing it.

In a sample paragraph, one of many that could be quoted, we read:

“The core arguments for free trade are as compelling today as they were when Adam Smith set these out over two centuries ago. These I characterise as the trinity of prosperity, freedom and security. The economic case revolves around a specialised international division of labour, unencumbered by artificial restrictions, that allocates resources more efficiently and leads to long-term productivity gains. All-round growth and prosperity are its results. The moral case for free trade centres on individual freedom. It is individual choice and entrepreneurship that drive international commerce and the resulting prosperity creates better life-chances. Finally, free trade contributes to a more secure international political environment. By forging commercial bonds among nations, it fosters better understanding among the peoples of the planet.”

That summarises superbly the vision of free trade. But there is still a long way to go. Modern protectionism is driven by a mixture of motives such as the anti-capitalist suspicions of anti-globalisation militants (including remnants of the old Marxist ‘Left’) and the hostility of those who suspect ‘western’ values affront their deeply felt religious beliefs. This is different from late 19th century protectionism, which primarily centred on crude nationalism.

The danger of the protectionism of the militants is that it denies the benefits of prosperity to those least protected from the horrors of their abject poverty. The dangers of the reactive protectionism of national states faced with the success of India and China (previously it was Japan and the ‘Asian Tigers’) is that it could stall the onward growth in prosperity (and political freedoms) that would benefit tens of millions of Asians and, in an extreme circumstances, it could provoke violent conflicts, including terrorism, among those aggrieved by their predicament, unable to share prosperity and excluded from sharing in political freedoms, and susceptible to domestic political and religious fanaticisms.

Raveen poses the crucial question:

“what about the future of free trade as an idea? It is vital that a rounded political, economic and moral case is presented, in the service of freedom, prosperity and security. In some ways, the post-1945 case for free trade has become too narrow and mechanical. It needs to burst these chains and return to its classical-liberal foundations in Smith and Hume. This throws up two points.

“First, the modern conventional wisdom has it that free trade abroad can be combined with Big Government at home. But free trade is part and parcel of free markets; it is part of a constitutional whole that includes limited government and laissez faire at home. Second, 21st century free trade should rely less on bureaucratic and cumbersome international trade negotiations and more on the 19th-century method of unilateral liberalisation. It spreads internationally by example and emulation. The WTO and other international trade agreements can be helpful auxiliaries, but their importance should not be exaggerated.”

LSE used to be a bastion of traditional classical economics (Lionel Robbins, for example) in the mid-20th century and it is great to read a spokesperson for the same tradition in the 21st century. His second point is particularly apposite for both India and China, both dominated by Big Government, with China further along the road to totalitarian forms of it than India (which is also a democracy).

Raveen’s bold point about spreading free trade by unilateral ‘example and emulation’ is really radical, especially for the major economies (USA and EU). Unilaterally abandoning protection in agriculture can be afforded, political opposition can be resisted and generosity can be justified in the great cause of creating global wealth (which is a creation of mankind) and eliminating absolute poverty (which mankind did not create and cannot eliminate by demonstrations and charity).

Raveen’s article concludes:

“John Stuart Mill remarked that it is “the word in season, which, at a critical moment, does much to decide the result.” It falls to free trade’s friends to spread their word in season with global political currents, anti-protectionist interests (such as exporters, downstream users of imported inputs, globally-integrated multinational firms) and (often unanticipated) events.”

That is the authentic voice of a classical liberal. Do what you can to spread it throughout the Blogosphere. Adam Smith’s legacy is safe in the likes of Raveen Sally’s hands.

A Shame that it Has to Go

An old, old story to do with street markets – of the kind that Smith knew well, as did his contemporaries, for they were the only kind of markets that existed before the end of the 18th century outside the largest towns.

Street markets were to be found all over rural Europe, even in the smallest settlements on ‘fair’ and ‘market’ days. Remnants still exist in rural France. Where I live for part of the year – in rural Gironde – there is a ‘market’ day in one or more of twenty nearby small villages and towns within an hours driving distance, and in the nearest large town, Libourne, they have a street ‘market’ on three days per week.

Ever since the early signs of the restoration and re-emergence of the commercial economy in western Europe, a thousand years after the fall of Rome and the consequential descent into barbarism plundering a depleted agriculture (with violent unequal ‘arguments’ over hunting between ‘poachers’ and "Lords' bailiffs"), street markets were the most obvious manifestation that one age was passing and a new one beginning.

Predictably, with the emergence of markets – their noise, smells, rubbish and occasional fights, the local authorities sought to organise and administer them, with fees from traders, licenses and levies, and always in the name of ‘good order’, always as part of efforts to stamp out ‘petty crime’ and always with a tidier vision for what else they should be like other than the sprawling reality of how they always became, over-spilling into near-by streets, occasional ‘illegal’ practices, a little gaming, some excessive drinking and occasional opportunistic prostitution.

The Warsaw Business Journal, 26th September 2005, reports a threat to its city’s world-famous ‘bazaar’ from the conservative-minded Law and Justice (PiS) political authorities in an article: “Stadium threat” by John Todd. He writes:

"The stadium is known for unsanitary conditions, crime, a lack of any standards. If we want to be a modern capital city, it can't go on," says Jan Ołdakowski of Law and Justice.
Traders from around the world hawk everything from sofa sets to pirated DVDs and icons to baby ferrets at the defunct football stadium in Praga.

Warsaw's mayor Lech Kaczyński, a fellow PiS member and the party's candidate in next month's presidential election, wants the central government to shut down the illegal traders, move the legal ones to a new site and rebuild the stadium.

It's estimated that 4,500 merchants ply their trade, compared to the estimated 4,000 at Istanbul's Grand Bazaar. Music, film and software groups say the stadium accounts for 25 to 30 percent of all pirated material - excluding Internet piracy - sold in the country.

A Polish woman, who gave her name as Małgorzata and who paid her way through four years of university by selling pirated DVDs, said the Armenians, Poles and Vietnamese who control the three main areas don't stray onto each other's turf.”

Comment:

Street markets are good for a community. They sell fresher food than supermarket chains, often straight from the farms and orchards they were picked from that same early morning. People of all income groups attend looking for ‘bargains’.

In post-communist regimes, they are great schools in entrepreneurship and the simple – but, heavenly – practice of exercising choice. In state-stifled capitalist countries they are areas of independence, good for the economy and for social stability.

The dead hand of bureaucracy cannot stand them (though their spouses and kids also use them) because they are out of their control. They send in the inspectors, the license sellers and the officious, and drive them into order and discipline on pain of the badge of criminality for any who resist.

The lack of hygiene, the petty criminality and the disorder cannot be tolerated and, without actually lowering their country’s crime rates, or its food poisoning, or the disorder, they kill-off a symbol of a country’s vibrancy. They turn their foods into bland imitations of the real thing in packaged cabinet-sealed super markets, crime continues but elsewhere, and where an area had colour, the smells of fresh food and the laughter of happy commerce, it becomes, well, a parking lot, a monstrous development and a city space of branded businesses, the same as in any similar city anywhere else.

Adam Smith’s world of street markets vanishes from another part of the world. Sad.

Makings of a Man of System

The Daily Collegian 26 September (Amherst, Massachusetts, USA) carries an opinion piece by Matthew Giancola, Collegian columnist, entitled “I want a government I can trust”.
In it he accounts for his disillusion with George Bush and his drift towards supporting somebody else, or at least looking for someone else to support:

“governing should not be about beating someone else. It's about making the country better when you leave than when you started. Government should be about helping people. It should stand for equality, liberty and justice; for helping those who, due to physical or social circumstances beyond their control, cannot help themselves.”

And what was the turning point in this student’s disillusion with Republican’s? The Energy Bill:

“Government should not be used to help self-sustaining corporations as is the case in the recently adopted energy bill. In this monument too big, wasteful government, millions of dollars are given to big oil companies that make hundreds of millions of dollars in annual profits; companies that aren't in dire need of receiving federal subsidies.”

He does not want government to do anything that would support the interests of ‘big oil companies’ (a fair enough populist cry), but difficult to achieve if you pass legislation on anything to do with oil because oil involves oil companies (and their employees and their families; and raises taxes to help those who “cannot help themselves”). Given that he asserts the US has a “wasteful government”, Matthew Giancola wants the same wasteful government to “help people”, particularly “those who, due to physical or social circumstances beyond their control, cannot help themselves.”

And then he brings in Adam Smith to the argument:

“To paraphrase Massachusetts Congressmen Ed Markey, "Adam Smith would be spinning in his grave." A well-worn cliché, long since drained of any literary power it had and as usual followed by an ascription to Adam Smith that has arguable relevance either to Smith or the subject:

“This money should go into helping small start-up businesses get on their feet. And since this is an energy bill, that money could go to companies developing new, clean energy alternatives.”

Think of the practical implications of this notion of organising ‘help’ from a ‘wasteful government’:

Define, identify and select:
‘small (how small?);
‘start-up businesses’ (how financially sound, how good are their business plans, what about the backgrounds of the people involved?);
‘get on their feet’; (how long do we give them, when do we pull the plug on them financially);
‘that money could go to companies developing new, clean energy alternatives’ (given the scale of the technology and finance involved and the years, perhaps, needed to prove a ‘clean energy alternative’, how much do we give to each venture and why are the ‘big oil’ companies, the one’s with the most experience and the best funded research programmes excluded from support?) and, if the above is not enough, how big an audit force do we need to monitor all this expenditure, check on its productivity and decide if it is working effectively – if efficiency is doubtful, I’ll settle, no doubt in vain, for effectiveness?

Matthew’s proposal uses a bogey target – Bush, who is having a bad time at present – and offers an alternative that appears attractive, yet when you look at it you see all the makings of a complete waste of large sums of money (taken from tax payers) to do what governments – any government, including one headed by Massachusetts Congressmen Ed Markey, or even Matthew Giancola – always do badly.

Governments cannot, and need not, devise schemes to reward entrepreneurs, except tax them lightly, maintain stable conditions and ensure that the law is enforced on their operations, as it is on individual citizens.

I am entirely unconvinced that Adam Smith would be spinning in his grave, either about America’s ‘big government’ or about ‘big oil’. He wrote eloquently, and often, about government waste, its susceptibility to lobbying by special interests, the impudence of governments thinking they can do better than individuals in the spending of their money, and the ‘men of system’ who offer plans for society that take account of everything but the fact that people are not ‘wooden chess pieces’, moved about by the hand of the players, but are humans who move about of their own volition.

And that was true in the 18th century; it is still true in the 21st (and, no doubt will be true in the 31st).

In the meantime, we should watch for the name of Matthew Giancola, because he has the makings of an electable politician (also known as a ‘man of system’) and may, some day, move closer to centre stage under the banner of ‘the man you can trust’, a marketing phrase we have heard before from every politician who seeks to manage the government’s chess board, but I sense something different in Matthew's article that suggests he means it.

Nothing to do with Invisible hands

From the Orlando Sentinel (Florida), 25 September: “Gas prices fast to rise, slow to fall: Economists call this phenomenon the 'rockets and feathers' syndrome.” It is written by Paul Adams the (Baltimore Sun) with contributions by Christopher Boyd of the Sentinel staff, so it is not clear which author is responsible for the following error:

“Theories vary as to why this happens, but economists say it has much to do with the vagaries of the nation's fuel markets, which are routinely buffeted by a volatile mixture of politics, natural disasters, erratic consumer behavior, and the unforgiving forces of supply and demand -- all guided by what 18th-century Scottish economist and philosopher Adam Smith described as an "invisible hand."

Hopefully, regular readers of the “Lost Legacy” Blog will recognise the avoidable error, picked up from woefully inaccurate lectures in Economics 101 (or possible something called “Bluff Your Way through Adam Smith”, authored by someone who never read a word of his).

I challenge Adams and Boyd (and anybody else) to show anything that Adam Smith wrote that links the well-known economics of supply and demand – of which there is nothing mysterious – to Shakespeare’s metaphor of the invisible hand (Macbeth, 3:2), which was used by Smith only once in “Wealth of Nations” (Book IV.ii.9, page 456), as a metaphor for something else entirely and and it had nothing to do with markets.

What happens when buyers panic in the face of a rumour of petrol shortages, following an event like Katrina, is predictable, well known and inevitable: they create the shortage they want to avoid.

That prices rise when a shortage threatens or eventuates is also predictable in a free market. It delays the time period during which the commodity (petrol/gas) become totally non-available. Leave prices where they are only speeds up the transfer of the commodity stored in garages to supply the normal quantity demanded to the tanks of consumers who take time to use it (and perhaps continue wasting it on non-essential travel). Meanwhile, the normal quantity demanded cannot be met because of the surge in the demand and the drop in supply, even before the quantity supplied actually falls because of whatever natural calamity causes the rumours. It 'brings on' (as Americans say) the effects of the calamity.

Again this has nothing to do with the invisible hand. In “Wealth of Nations” (Book IV.v.b: pages 524-543) when Smith discusses ‘dearth’ (in this case situations that lead to famines) he does not mention invisible hands at all. Where Adams and Boyd get the connection from I have no idea, except it never came from Adam Smith.

An Excellent and Imaginative Suggestion

Paul Hutcheon in today’s Sunday Herald, 25 September, (Glasgow) writes an article, “Tourism bosses told: market the Enlightenment”, making an excellent and imaginative suggestion from David Speedie, special adviser to the president of the Carnegie Corporation in New York: “the Scottish Enlightenment is a unique selling point that could bring thousands of overseas visitors to the country.”

“The Scottish Enlightenment, which stretched roughly from 1740 to the early 1800s, is widely regarded as a period when Scots led the world in philosophy, political economy, history, architecture and geology”, writes Paul Hutcheon. “Kirkcaldy-born Adam Smith is one of the most revered figures of the age. His tract, The Wealth Of Nations, has inspired free marketeers and economists all over the world.”

Comment:

I certainly welcome such a suggestion, more for the outcome – a wider appreciation of what the Enlightenment was about – than for the likely means – a state-financed quango to oversee it, which, if not careful, would bureaucratise it and donate along with its (our!) money the usual dead hand of expensive lack of imagination. Of course, an Enlightenment Promotion Office ran from within the civil service would be much worse!

The Adam Statue, to be erected in Edinburgh’s High Street by private donations and outside the suffocating hug of government, is an excellent start to such a campaign, followed by the renovation of Adam Smith’s grave a short walk down the same High Street (though, true to form the offer of private funds for the expense, about £10,000, is snarled up in the Council’s Planning Department). Recently, I commented here on the Enlightenment links in the recently announced Edinburgh Literary Trail.

With Speedie’s suggestion it seems there might be momentum growing to do something worthwhile with it. Other key figures from the period were Frances Hutcheson, whose philosophical formula, “the greatest happiness for the greatest numbers”, anticipated utilitarianism, and, of course, the towering figure of David Hume, born at Ninewells, near Edinburgh, who contended that moral values and judgements were social constructs. As were Lord Kames, John Dalrymple, Adam Ferguson, Professors Black and Hutton, Professors Stewart (father and son), William Robertson, Andrew Carlyle, and the Adam family of architects.

From Wall Street Journal to Moral Philosophy

In yesterday’s Blog on the discussion between Professors Russell Roberts and William Polley in the Wall Street Journal (WSJ), I praised them for the excellence of their article. I have since followed up by looking at their Blog sites (www.marginalrevolution.com and www.williampolley.com/blog).

On William Polley’s Blog he carries, today, a reference to an article in WSJ, 29 September 2004 (http://www.opinionjournal.com/extra/?id=110005687) by Professor Deirdre McCloskey, who teaches economics, history, and English at the University of Illinois at Chicago; and philosophy, economics, and art and cultural studies at Erasmus University of Rotterdam. She is the author of 20 books on economics, British economic history, and the rhetoric and philosophy of economics; and is finishing another called "The Bourgeois Virtues: Ethics for an Age of Capitalism." Her article appears in the Fall 2004 issue of In Character: A Journal of Everyday Virtues. I think readers of “Lost Legacy” would find it most interesting on its own account and also because of her many references to Adam Smith and “The Theory of Moral Sentiments”.

Entitled, “What Would Jesus Spend?: Christian virtues won't hurt the economy”, Deirdre McCloskey, says much with which I would agree, and as it is consistent with Smith’s approach in “Moral Sentiments”, I feel sure he would have agreed with her too.

However, this is a Blog dedicated to being accurate about what Smith wrote and asserted in the context of mid-18th century Britain, and I am therefore obliged out of defence of our standing policy to comment on one area of Smith's work where I believe Professor McCloskey goes astray. It concerns, you may not be surprised to know, the vexed question of the metaphor of the invisible hand, though not of the kind that such errors of attribution normally attain.

She explains Smith’s acerbic comments on the consumption by the “proud and unfeeling landlord” who forgets “his brethren” and imagines he consumes all of the produce of his lands, but because his stomach is no bigger than a poor man’s, he receives ‘no more than that of the meanest peasant’ (TMS IV.i.10. page 184). In “Wealth of Nations”, Smith adds that the “rich man’s” desire for ”the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary” (WN I.xi.c.7. page 181)

Professor McCloskey comments:

"This is all true. Millionaires, and especially billionaires, have limits on how much they can use those incomes so much higher than ours for correspondingly unequal consumption--of, say, trousers. But Smith--arguing in effect against Rousseau's notion that property brings inequality in its train--goes too far. In consequence, he says cheerfully, the rich "are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.

That is incorrect. Smith is forgetting that if, say, Saddam Hussein took 50% of Iraqi national produce and put it into arms and palaces, the stuff was in consequence not available for ordinary Iraqis to consume as food or fuel or shelter. Iraq was impoverished, and so the necessaries of life were available in nothing like the distribution that would have been made under equality. The percentage distribution was the same--one man, one pair of trousers--but the absolute amount was reduced by the needless luxury. Saddam may not have gotten the benefit of palaces he never visited. But neither did anyone else. Socially speaking the resources were thrown away. What a rich woman cannot consume, such as the diamond bauble that sits unworn in the back of her jewelry box, is simply wasted, socially speaking. She gets no pleasure from it, except perhaps the happy memory of its purchase.”

I respectfully disagree with her assessment of the veracity of Smith’s assertion, without it in any way undermining the excellence of the rest of the full article. Let me dissect Smith’s actual statement to show why. The rich landlord cannot consume all the produce of his land. The surplus above his own consumption he is:

“obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the œconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessities of life, which they would in vain have expected from his humanity or his justice.”

The “rich landlords” select from the heap of produce ‘what is most precious and agreeable” and:

“in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end of which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.”

This leads directly to Smith’s only reference in the “Moral Sentiments” to Shakespeare’s metaphor of the invisible hand (Macbeth: 3.2) and makes its context clear (above all, that it had nothing to do with the working of markets; which ‘workings’ are certainly not mysterious and are well known):

“They [the rich landlords] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided in equal proportions among all its inhabitants, and thus without intending it, without knowing it, advance the interests of society, and afford the multiplication of the species.” (TMS IV.i.10 pages 184-5)

Smith’s assessment was absolutely correct. First, look carefully what he said. The rich landlord believes he consumes all that his land produces, but in order to eat his food, sitting in a palace (compared to the hovels lived in by his retainers and serfs – except those retainers living in the servants quarters of his palace), prepared by his cooks, served by his waiters, fitted out and maintained by his retainers and protected by his armed guards, all of whom receive a share (not a fair share) of the food distributed to them by the rich landlord, or more accurately by his ‘Factor’ and his Oafs, which comes from the large pile his lands produce.

Moreover, the serfs who work his land, plant, tend and harvest the crops and shepherd his sheep, goats, horses and cattle, also draw of the same pile (again not fair shares), as do the local clergy in the Church, and so on. Rich men also fancy (‘insatiably’) “all the different baubles and trinkets”, plus covers, cloaks, trousers, kilts and nick-knacks, all of which are produced and sold to him for his ‘gratification’ and vanity and delight by those who produce them or bring them in trade. All these people receive in return the necessities of life, in some measure related to their value, or the equivalent in coin.

Now Smith’s proposition is perfectly accurate. For a single rich landlord his annual produce is distributed in this manner and they receive: “nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided in equal proportions among all its inhabitants”. Each family’s share is “nearly” the same (i.e., probably less) than it would have been if each family had the same amount of land to live off. I should think that this would have led to a smaller total annual produce for the same number of people because of the inefficiencies in small holdings, without the progress of the “improvements” wrought by feudal tenures, and the ‘protections’ afforded by his landlord.

Now what is true for a single rich landlord would have aggregated to a similar truth for a society of all landlords. All that is produced is consumed, unequally, but the subsistence level would be sufficient for the “multiplication of the species” (a prime objective of the ends of nature in “Moral Sentiments”).

This leaves the validity of Professor McCluskey’s analogy of Saddam Hussein’s palaces and the Iraqi population in her article:

“The percentage distribution was the same--one man, one pair of trousers--but the absolute amount was reduced by the needless luxury. Saddam may not have gotten the benefit of palaces he never visited. But neither did anyone else. Socially speaking the resources were thrown away.”

This does not invalidate Smith’s assertion, Saddam Hussein being no stranger to “selfishness and rapacity”. His palaces were guarded by retainers and soldiers, watched by his police, courts and jailers and built and maintained by labourers, and in so far has they were paid for these services, as were the rich traders who visited him and his bureaucrats and sold him ‘trinkets and baubles’ (and weapons), they too shared in the stolen loot of 50 per cent of GDP in Professor McCloskey’s scenario. The people of Iraq were poorer than they needed to be in much the same way as were the retainers and serfs of feudal Britain in the 18th century. But the appropriate distribution of income is not Smith’s point so much as the effect of these motivations from which the rich landlords believed they benefited. The equity, efficiency or otherwise of these operations has nothing to do with the point Smith makes.

It was the lure of trinkets and baubles that finally undermined the power of local feudal lords; they handed over their surplus produce to traders and manufacturers and in consequence, had to free the serfs from feudal to tenancies, which reduced the lord’s powers militarily and politically. The towns grew more powerful and, with the re-establishment of commerce from the 16th century on, led to the growth of markets and the political powers of the new rich merchant and manufacturing classes. As they say, the rest is history.

Professor McCloskey’s last point in the article is so accurate and worth noting that I hope my above critique does not leave anybody doubting that she is a person worth reading (check out her article):

“The businessmen wearing the Adam Smith ties need to do a little reading of “The Wealth of Nations” and especially The "Theory of Moral Sentiments" on the train from Westport. Smith did not say, ever, that Greed is Good. And the Christians and other opponents of the sin of avarice need to stop conceding the point to the men of Westport. There is no paradox of thrift, not in a properly Christian world. Nor even in the world we have.”

(Google 'Deirdre McCloskey' and read some of her other articles.)

Global Trade Has a Long History

In today’s (23 September, 2005) Daily Times, Pakistan (‘your right to know – a new voice for a new Pakistan’), Dr Johann-Volker Peter, attorney-at-law in Frankfurt/Main, Germany, writes in an article “Globalisation: investment in a world of scarcity and complexity”:

“Anti-globalisation activists protest against international economic institutions, international groups, global trade agreements, international investments, and the alleged negative consequences for the poor. They are wrong. Globalisation is not just ‘international agreements and institutions’ but also a complex historical process. It is rooted in the worldwide division of labour and production. It is consequence of the scarcity of goods and the complexity of life.

Already in 1776 Adam Smith (1723-1790) had explained in his Wealth of Nations, “A country that has no mines of its own must undoubtedly draw its gold and silver from foreign countries in the same manner as one that has no vineyards of its own must draw its wines.” Thus he pointed out in the 18th century a principle that holds in the 21st century: a scarcity of goods and factors of production leads necessarily to a globalised economy. International investments are required to cope with the scarcity of goods, factors of production, and complexity of the world economy.”

Comment:

Globalisation has become one of those buzz words signifying what is presented as a new discovery: international markets and supply chains, as if these are something new. Some people even talk of the ‘first era of globalisation’, which apparently ended in the 1914-45 European wars, followed now in the 21st century with the ‘second era of globalisation’ (with the implied threat it too will end in global wars). Such talk is non-historical; suited for pressing the case of ‘imminent new threats’ and mobilising excitable demonstrators, but of no significance for understanding, nor of much value as a prediction.

Global trading has a long history – several millennia – and is not just a late modern invention. Evidence of trade in the earliest surviving remnants of human settlements (including Neanderthals, as well as Homo sapiens) show that trade was conducted over quite vast distances (modern Germany to modern Spain). The Roman Empire was a commercial society, not just an agricultural society, and when it fell to barbarian invasions, an almost trade-less society endured for near-on a thousand years (500 – 1500 in the Common Era), until gradually restored, and on which Adam Smith famously cast his gaze inn the mid-18th century.Even in the depths of European barbarism – around the first millennium of the Common Era – traded goods travelled from as far as Cathay (China) (silk) and across Northern Europe from the Baltic, from southern Europe and from Aquitaine (south-west France).

The history of the world since the first millennium (CE) is a history of the expansion of international trade, first in commodities, which only the families of ‘Princes’ consumed, until today where the families of the entire spectrum of society are joined in international divisions of labour and their concomitant necessity, international markets.

Price 'Gouging' Again

Staff writers at the Independent Record, Helena, MT, USA, compile thoughts on gasoline ‘price gouging’ following Katrina (21 September 2005).

They report that some people were surprised to hear President George Bush was among the politicians warning against ‘price gouging’. They comment:

“But, despite the president's capitalist credentials, they shouldn't have been surprised. Bush is a politician, and responding to constituents' concerns is what politicians in a democracy do. … Voters may not fully understand the mechanics of fuel pricing, but they know when they smell a rat.”

This is an example of the economic illiteracy discussed in the previous post, evidenced by the comment they make next, with its gratuitous mocking of Adam Smith ('deity' indeed) and the usual rubbish about the invisible hand:

“Well, people less than convinced of the deity of Adam Smith and the "invisible hand" of his ideal market might agree with this basic lesson in economics 101, but that doesn't prevent them from noting that one whole heck of a lot of money is going somewhere real fast. It's not necessarily going to the guy who runs the gas station on the corner — his profit margins probably haven't changed much at all — but somebody is making out just fine.”

The point of gasoline prices going up rapidly is to deter, if not eliminate, people buying gasoline at the old lower price and to drive some of the quantity demanded off the market temporarily until the impending or actual shortage eases. True, you could achieve this several other ways, though none of them is as efficient as letting prices rise.

You could appoint special deputies to attend each garage forecourt and interview the car owners to decide (on some specified criteria) just who should be allowed to fill-up at the pumps. This might take some time to a) specify the criteria to meet the community’s priorities; b) argue it through with those disappointed at not meeting the criteria, and c) have law officers present to arrest those who refuse to leave without gas/petrol and to deter attacks on the deputies.

You could leave prices as they were – ban any price rises – and allow people to fill up (from an orderly queue? – who enforces it?) until the garage empties of gasoline, as it surely will speedily from panic buyers led by rumours. Then nobody else would have access to gasoline no matter what their need or their willingness to pay higher prices, no matter how high they might have gone.

Of course, it is possible that owners of garages would close-up their premises and go home, on grounds that the aggravation of dealing with angry drivers was not worth the hassle.

The staff writers concede these points:

“It's probably true that rising prices are slowing demand and thus preventing long lines at the pump.”

Their objection to prices rising appears to be concern about who is gaining from the price hikes:

“But we're paying mightily for the privilege of a quick fill-up.”

The gasoline companies make windfall profits in the short run (so does the government from gasoline taxes, normally proportional to the price per gallon/litre). That is the ‘price’ we pay for having the market constrain the quantity demanded; the purpose is to eliminate the queues of those who do not want to pay, or cannot pay, a higher price and who can make do with what they have in their tanks or who can make other arrangements during the shortage.

Proposals for windfall taxes of the oil companies won't do anything for the owners of cars paying more for their mobility. Others advocate the government should cut its tax on gasoline and reduce prices. Well, no faster way to empty the garages of gasoline could be devised - then a pending shortage would become and actual one within hours.

“Maybe it isn't quite right to call current pump prices "gouging," … but it won't hurt a bit to have state attorneys general and other elected officials investigate the matter. In a democracy, that's what those officials do.”

Sure. Have an investigation, afterwards. Perhaps a public inquiry. But for now, during the early hours of the shortage, let markets do their work, quickly, efficiently and without fuss. That’s what markets do.

Good Sense on Illiteracy in Economics This Month's Prize?

Two economics professors in the Wall Street Journal on-line discuss economic illiteracy and contribute perceptive thoughts on the problem and consequences of public ignorance of economics. Their discussion is reproduced in: “Knowledge Deficit” on 21 September. Russell Roberts is a professor at George Mason University and William Polley is a professor at Western Illinois University. I provide two short extracts, which do not do justice to the debate at all (see www.wsj.com for the full debate):

Russell Roberts writes: What is economic literacy and is it important? I'd start by defining what it's not. It's not financial literacy. It's nice to understand how the stock market works, how compound interest can grow faster than you might think and how to balance your checkbook. High school classes, along with the media, often mingle the two kinds of literacy, which continues an unfortunate confusion that economics is mainly about money.

Bill writes:. Perhaps a return to the ideas of Adam Smith as expressed in both "The Wealth of Nations" and "The Theory of Moral Sentiments" would yield some suggestions though, because I think it would reveal how much more broadly we have to think.

"The Wealth of Nations" is a treatise on man's interaction with his fellow man in the marketplace. That is, it's a study of prudence. Today, it ends up being taught as constrained maximization, and in the rush to cover all of the techniques, essential insights can be lost if you're not careful. A thorough examination of the virtue of prudence as Adam Smith perceived it would be time well spent, and it's a nice complement to the idea of constrained maximization for those who are technically inclined.

"The Theory of Moral Sentiments," on the other hand, is a treatise on temperance. It is a study of propriety, sympathy, and justice. Sadly, many people don't even know the book exists or that it was written by the man who is sometimes called the "father of capitalism." Ignorance of Smith's other major work leads people to think that economics is only about greed, self-interest, and rational maximization. As a result, many intelligent people who would be quite capable of becoming economically literate are turned off to economics because they see it as promoting a "greed is good" mentality that doesn't square with their world view. Unfortunately, this perception is so well embedded in the pop culture view of economics and economists that it may be very difficult to reverse.”

And Russell Roberts comments on the role of the Blogosphere:

“Russell: One source for optimism in this otherwise bleak analysis is the blogosphere. I think it's very hard to teach the economic way of thinking. But reading the best economics blogs is like sitting around the faculty lounge absorbing the economic way of thinking by example. The blogosphere has made it a lot cheaper to acquire good economic intuition. And it has made bad journalism a little more expensive.

Bill writes: Naturally I share your sense of optimism for the blogosphere, Russell. One can get quite an education from a regular reading of some of the many fine economics blogs. I see incredible potential in this medium for communicating the economic way of thinking to a wider audience.”

Comment:

The debate as a whole, and Professor William Polley’s suggestion on reading Adam Smith’s two works in particular, is prime candidate for this month’s ‘Lost Legacy Prize’.

Economics teaching is in good hands if Professors Roberts and Polley are representative of the profession; patently they are not, though the main problem is what many others have been taught as students in in Economics 101 and beyond. We read of some of their errors in the world’s media in "Lost Legacy" every day almost.

I like the line that the Blogosphere has made ‘bad journalism’ ‘more expensive’. In correspondence I initiate with some of the authors of the pieces I report here, several reply they had only repeated what they had been taught; a few that they had been teaching the error for long enough, but they would rephrase their words in future.

Separation of Markets from Religion

In an article published in “England on Sunday”, a paper from from within the community of the (Anglican) Church of England, Marcus Braybrooke, writes in “The Record - Bringing theology and economics together again”:

“Economics has its origins in ancient Greece and its roots in ethics. Aristotle, for example, said that the ultimate purpose of politics and economics is ‘the good of man.’ It is also forgotten that Adam Smith was a professor of Moral Theology and wrote The Theory of Moral Sentiments 16 years before his famous book The Wealth of Nations. In The Wealth of Nations itself, Adam Smith laid the groundwork for economic analysis but this was embedded in a broader discussion of social justice and the role of government. He observed that “Commerce… ought naturally to be, among nations, as among individuals, a bond of union and friendship.”

Braybrooke also states:

“the guru of the World Economic Forum, George Soros, has warned that if economic activity is governed solely by the principle of self-interest, it is in danger of undermining social values and loosening moral constraints."

He also recites the pessimistic changes wrought by countries like India and China on levels of world poverty and repeats that fallacy that poverty is getting worse, when in fact the data show that poverty is decreasing, not increasing, and that this is a result of loosening the central powers of the State and allowing markets to develop more freely.

“Certainly the widening gap between rich and poor is intolerable. I have never forgotten on my first visit to India over 40 years ago seeing young children picking over the rubbish heaps looking for a scrap of food. The gross inequalities in our contemporary world are iniquitous and getting worse. Half the people on earth live on less than two dollars a day, a billion people on less than a dollar a day. A billion people go to bed hungry every night – and a billion and a half – one-quarter of the people on earth — never get a clean glass of water. One woman dies every minute in childbirth. The situation is aggravated by the spread of HIV/AIDS. Two and a half million people were expected to die of AIDS in the year 2004. Rightly, the conference in Kenya at which our book was launched, was preceded by a visit to an orphanage for children — some of whom were themselves infected – whose parents had died of HIV/AIDS.”

A great deal has changed in 40 years (1965!) in India and China (and Taiwan, Guandong, Shanghai, Malaysia and Singapore) since Braybrooke watched the all too common sight of people picking over the rubbish dumps. Tens of millions have been brought beyond poverty with work opportunities in thriving economies (for recent data, see www.globalizatioinstitute.com). Markets are doing more for making poverty history than all the demonstrations, all the wringing of hands and all the slogan shouting; that they don’t shout about the tremendous strides in enriching poor people – which it is plain to see travelling around these countries – can only be because the facts of the changes undermine the story that it’s getting worse, not better, and it would, of course, mean fewer sales for books telling them the opposite.

Adam Smith analysed the problem of the poverty of nations by looking for data on how nations could grow wealth and what made it difficult to do so if countries curtailed economic activity. The Soros view that ‘self interest’ is the problem (which, I may say, is a view he came to have exhibiting his self interest unashamedly in a very unSmithian manner for years – though it is better than a sinner is repentant than that he continues with ‘sin’) misses the point about self-interest in commercial economics. It is the mediation of self-interest in commercial bargaining – ‘I can only get what I want, if and only if I give you what you want’ (Wealth of Nations, Book 1, chapter 2). Two self- interested ego-maniacs will fail to agree to a bargain if they remain ruthlessly committed to their own self interest and do not take account of the other party’s self interest, and what is true for one of them is true for the other. That is the meaning of Smith’s reference to the ‘bonds of union and friendship’.

Whether there is much to be gained from brining ‘Economics and Theology together again’ is debateable. The history of religion and commercial activity is not replete with great examples or encouraging precedents. The Church in Smith’s day took a reactionary view towards commerce and to those who advocated Natural Liberty (for example, David Hume and Adam Smith) and sided throughout the ages with Mercantile interests that treated neighbours as the enemy. The problem is that religious people see themselves as the paragons of morality; the fount of all ethical policies. Braybrooke advocates unspecified ethical policies and declares: “It is now vital that moral constraints are applied to globalisation.” He hopes that globalisation will bring people to a common sense of ethical purpose.

In Smithian markets the players are free to do what they wish under the necessary constraint of the rule of law and justice and not to harm others. Illegal actions, anti-social policies of pollution dumping, toxic waste, and dangerous production methods, are no part of a Smithian market. What role there is for religion in the rule of law is not obvious and given the intolerable behaviours that often result when religions meet in close proximity, I do not expect much from their contributions – before they preach to others they should put their own inter-faith relations in order.

LibDem Spokesman Refers to Adam Smith

Oliver King, political editor of The Guardian, 20 September 2005, interviews Vincent Cable of the Liberal Democratic Party. He opens with:

'If the Liberal Democrats were a different kind of party, Vincent Cable would be the man who told his colleagues to turn the music down and go to bed. A self-styled "enforcer", he has to impose financial discipline, reign in uncosted spending pledges and give the party much-needed economic credibility. That doesn't always make him the most popular Liberal Democrat, but his is a role that could be crucial to the future success of the party. A look at the opinion polls suggests more people would vote for the Liberals if they trusted them on taxation. Hence Mr Cable's belief in "fairer not higher" taxation'

At the end of the interview he asks:

“OK: You're often perceived as being on the right of the party, if that's a fair term. On a personal level, who is your political hero?

VC: Let me step back a bit. I'm not on the right. I've just written a pamphlet for Demos where I've tried to debunk the whole concept of left and right polarity. It clearly exists on a limited scale as a principle in politics, in terms of identity, immigration and Europe. But I don't think it helps to be put in a box of being right, left or centre. In terms of a personal hero, I don't have one individual, but there are people in the liberal tradition who I've studied who I've found inspiration from intellectually and in other ways. I'm an economist and Adam Smith was someone who came up with a lot of the ideas we have today, not just markets but capitalism with a moral purpose, essential public goods that came from Adam Smith, not just free trade. If you look through the nineteenth century, figures like Gladstone and Lloyd George and social democrats like Roy Jenkins, they've all played a role in building how I look at the world.”

Comment:

It is becoming fashionable (which, at least, is a step in the right direction) for UK politicians to refer to Adam Smith in terms of his decency, his humanitarian approach, his moral sentiments and his sympathy for the underdog. This is in contrast with the more usual rabid and extreme presentation of Adam Smith as a ‘social-Darwinist’ (actually a libel on Charles Darwin), of so-called laissez faire dogmas, unsentimental adherence to libertarian free markets and, of course, an orphan child of that misused metaphor, the invisible hand.

Jacob Viner, that great Smithian scholar of the first half of the 20th century, remarked in regard of the “Wealth of Nations”:

“Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations to support his special purposes.”

(Jacob Viner, ‘Laissez Faire’ in Adam Smith, 1776-1926: lectures to commemorate the sesquicentennial of the publication of the Wealth of Nations, Augustus M. Kelly, 1989 [1928: University of Chicago], page 126).

And this is the problem with the recent fashion of quoting Adam Smith in political debate (as Roy Hattersley does in one of today’s Blogs). Each side quotes what suits them and neither side show any inclination to take Smith’s views in their whole – usable quotes along with the unusable quotes, or better still by demonstrating knowledge and familiarity with his entire Works – to present a complete picture of Smith’s views rather than the partial one with which they agree.

History Tour and the Price of Petrol in Nigeria

In Vanguard, (Lagos, Nigeria) Morenike Taire writes a strange piece around a theme of Adam Smith to which “Lost Legacy” might be sympathetic, but which goes off the rails at times and ends up without being clear what it was about (this may, of course, be due to references to local Nigerian events of which I am not aware).

Morenike writes:

“It all started, supposedly, with Adam Smith, and his theory that screwed up the study of economics forever. That, sentimentally arguing, might not have been the intention of the so-called father of modern economics who, by his 1776 book, The Wealth of Nations, changed the way the world functions forever.

Smith approached the issue from a totally different angle from what his capitalist descendants today approach it. He might be said to have been patriotic, seeking to reach nationalistic interests by individualistic means. His descendants, on the other hand, go about it the other way, mainly in using national means towards individualistic ends, and pretending to be sticking strictly to the ideals of their founding father.

Smith’s argument had been that the wealth of nations could be increased by allowing the individual to seek his own self interest and by removing government control over the economy.

He further proposed a deliberate minimization of the role of governments and the maximization of the role of the free market. Smith might have hoped, by his widely controversial and acclaimed theory, that the capitalism he endorsed would promote political freedom and by extension, economic freedom. This might explain why while today’s capitalists use Adam Smith’s theory as their defense, today’s socialists also borrow from him.”

See what I mean about it suggesting a broadly correct stance on the treatment of Adam Smith’s legacy? (Interesting comment following my item below on Roy Hattersely's resort to quoting Adam Smith when espousing leftwing socialism.) It continues:

“The result is the confusion of the layman, who makes up the vast majority of the world’s population today. When Smith wrote his book, the world was in a warped stage of its development.

International politics and economics where Africa was concerned for instance, centered around whether the economic justification for building the wealth of the new world by the trade in African slaves and the cheap labour it provided, ought to or ought not to supercede the moral outcry against the trade from both within the new world and outside of it.”

Smith, of course, was never sympathetic to slavery, which we should remember was not a monopoly of the New World, but had a considerable history and presence in the Old World too, especially in the Arab countries on North Africa and the Middle East (and also in Russia, parts of what we now call Germany, the Balkans and further East).

The Morenike runs two events together, separated by more than a hundred years if indeed it was ever a conscious decision:

“Eventually, the scale tipped in the European favour, and in favour of the unwritten theory that a great deal of transport costs and the nuisance of moral sentiments can be spared if, instead of shipping out the slaves, they were simply made to do the work at home and to feel good about it to boot.

Diplomacy then became the art of being able to tell someone to go to hell and they actually look forward to the trip. Democracy, then, was only for a few, and not the new religion it has now become whereby nations of the world are encouraged either to accept, or die!”

Make of that what you will. I find it difficult to disentangle it to understand what the author is saying.

“Self interest, then, did not foresee a global village, and nations had referred to the ancient concept. The world, including Adam Smith, could be excused if they had not imagined then, that the wealth of the world would one day lag on a global village as long as the wealth of Africa lags.

Can it be excused though, if Democracies in Africa do not recognize this? Can African leaders be forgiven for adhering to the evolved version of Adam Smith’s theory, which only pretends to put the nation first?”

Near the end we find:

“It is in Nigeria that Smith’s theory is corrupted to the most ridiculous level; where services are said to be totally deregulated, yet government fixes the price by fiat. The NNPC boss was even on TV to threaten those who dare to overshoot the sixty five naira mark.”

If this is an ironic stab at the doctrine of free markets up against the practice of State price regulation, it makes sense; if it is something else, it doesn’t. This seems a long way to go round – Smith’s “Wealth of Nations”, a summary of his views, the slave trade, the end of colonialism and the rise of African national states – to get to the price of petrol and the issue of price capping petrol.