Smith was Not a Prophet

In a bio piece by Mike Dorning (Chicago Tribune) in The Mercury News, San Jose, (http://www.mercurynews.com/mld/mercurynews/news/politics/13042213.htm), 31 October, we read about a newish, but rising, Congressman, Mike Pence. He is described as “becoming the voice of small-government conservatives”.

Apparently, “Mike Pence begins every day by reading the Bible. He works with a bronze bust of Ronald Reagan watching over him from across his office. And his vision of heaven, he said, is studying the free-market economist Adam Smith in the morning and riding horseback in the afternoon.”

He also prays a great deal. Nothing at all wrong with any of that. In a free country everybody has a right to conduct themselves within the law as they please. Smith called that Natural Liberty.

Assuming that Congressman Pence is studying Adam Smith’s Works systematically, I applaud his study plan. So many people who are quick to quote Smith just rely on the odd extract, usually torn out of context. But if he is reading Smith in the same manner as he reads his Bible (from Joshua one morning to Genesis the next), I am concerned at the image of Adam Smith he projects – as the author of a kind of Biblical text, with revered passages to be chewed over and interpreted like one of the Old Time Prophets.

Smith was not a ‘High Priest’, a ‘Prophet’ or the ‘Father’. I do not think he was a ‘conservative’, more of a radical traditionalist who believed that changes in society came best from gradualism, not revolution’ or sudden lurches, and that above all, those proposing reforms should always be aware, out of ‘common humanity’ of the impact of their proposals on those least able to protect themselves and should take this constraint into account when they impose too hasty time schedules for their reforms to take effect.

Trade-off between Freedom and Security

Michael F. Cannon has an article published in CATO Institute, 31 October, (http://www.cato.org/pub_display.php?pub_id=5138), which was originally published in National Review.com on October 14, 2005, entitled “Choice and Security”

In it he poses a most interesting question:

“Which would you rather have, freedom or security?

The Left has argued that since September 11, 2001, President Bush has curtailed civil liberties in an attempt to keep America safe from terrorism. Few people on the Left believe this bargain will pay off, and the skepticism runs deeper the farther left one moves across the political spectrum. The same cannot be said when it comes to economic freedom. Here, acceptance of a trade-off between freedom and security increases as we look leftward. In The New Republic, Jonathan Cohn recently asserted the existence of that trade-off — and argued for making the trade — on issues from Social Security to education to healthcare.

Cohn criticizes conservatives for selling greater choice in these areas without acknowledging that it would result in less economic security. His argument goes like this: The limits on choice that conservatives would sweep away also make people more secure. Social Security provides Americans a guaranteed pension; having the choice of putting one's Social Security taxes in a personal account would weaken that guarantee. Public schools are devoted to educating all comers; vouchers take money away from those schools and that mission. Each state has its own set of health-insurance regulations, many of which attempt to make coverage more affordable; allowing consumers to choose what slate of regulations they want would make those well-intentioned rules less effective.

Though not a conservative, I will break bread with conservatives when their aim is to tear down barriers to choice. Social Security privatization, school vouchers, and deregulating healthcare would expand the menu of choices available to ordinary people. There is an alternative explanation of the relationship between choice and security: Rather than crowd out economic security, choice actually increases it, whether it's saving for retirement, educating one's children, or protecting one's health.

Who Wants to Buy from a Government Monopoly?

My argument goes like this. From whom would you rather buy bread: a government monopoly, a private monopoly, or one of a number of competing grocery stores? It's really not much of a contest. The government and private monopolies would have consumers right where they want them. They don't have to take much care to meet specific needs, and they are likely to overcharge, which leaves consumers with less money (i.e., they are less economically secure). Competing grocery stores, on the other hand, will fall over themselves to provide fresh whole grains at a price that most increases a consumer's economic security.

Adam Smith said it well: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." But once consumers are dispossessed of their freedom to choose, businesses worry far less about consumers' economic security.

That is the basic argument. But it is over time that choice really begins to look good. In the process of falling over themselves, those producers strike upon tiny improvements in quality, delivery, etc., all of which translates into even greater security. Such innovations have caused prices to fall for everything from food to computers to telecommunications. Over time, choice makes products of ever-increasing quality available to an ever-increasing number of people at an ever-decreasing cost.”

Michael F. Cannon makes a compelling argument. Competition disciplines producers into trying harder to earn the consumers’ spending and disciplines those inclined to create monopolies into avoiding anti-consumer practices that raise prices and thereby profits at the expense of consumers and their real incomes.

The impartial competitor in Smithian markets is analogous to the impartial spectator in moral sentiments. Unfortunately, many who quote Smith on the ‘butcher, the brewer and the baker’ confine themselves to only part of the transaction. In fact, almost the entire economics profession has ignored the while exchange process at the heart of every economic transaction ever carried out.

Most economists believe that prices are formed, goods are exchanged, wants are satisfied, as if in an instant auction system – sellers cry out a price and buyers respond with their cash. Smith spent a little longer on the formation of bargains and so should modern economists. Instead, they fell into what I called the ‘fundamental error’ in “Adam Smith’s Lost Legacy” (2005). They saw only one side of the transaction – the “butcher, the brewer and the baker” acting in their self-interest – and forget the effort required for two parties, each acting in their self-interest, to mediate their different interests (sell dear, buy cheaper).

Each party to a market transaction has to address the interests of the other; buyers raise their offers; sellers lower their demands, until a common price is struck, for there can only be one price in a market transaction. When buyers contemplate competitive prices from several butchers, brewers and bakers and choose the price closest to their offers, the negotiation is silent, but the outcome is the same as if they had stood and tried to bargain with the sellers verbally (as some do; and in marekets for major transactions almost all do).

The same is true for the sellers contemplating potential consumers in a competitive market; they survey the different buyer’s offers and select the one closest to their demands (silently) or from verbal attempts to bargain. Each addresses the other’s interests to persuade them to transact close to the range of prices they have selected for that purchase or sale. In fact, Smith goes on to describe this very process in the same chapter from which the ‘benevolence’ of the ‘butcher, brewer and baker’ is dismissed.

Likewise, the impartial spectator operates in what J. R. Otteson calls the ‘moral market place’, except ‘prices’ as understood by economists for economic goods (excess demand at zero prices) are not the instrument of the transaction (a point, respectfully, I think is not fully appreciated by Jerry Evensky in his brilliant recent book, Adam Smith’s Moral Philosophy, Cambridge 2005). In the moral market place, 'exchanges' are the reciprocal favours (good turns, obligations, expectations, etc.,), universally common in all societies and throughout history and pre-history, and their practice has a decisive role in social relationships.

Smith alludes to this in "Moral Sentiments" (TMS II.iii.2: pages 85-6): “by a mercenary exchange of good offices according to an agreed valuation.” Reciprocity was the basis of the first transactions between humans (and I believe among the pre-human hominids, the ‘Brutes’) which evolved, socially, over millennia into transactions recognisably economic in the form of exchange through trade between strangers.

With these caveats, Michael F. Cannon’s article is a welcome contribution to the restoration of Smithian political economy and moral philosophy.

Impact of Religious Doctrine on 18th century Authors

Professor David R. Keller, Director of the Centre of the Study of Ethics at Utah Valley College, (The Salt Lake Tribune www.sltrib.com) in an article discussing the confusing distinctions between the terms ‘Liberal’ and ‘Conservative’ in the US (not mentioning the confusion caused by these same terms in the UK) makes an aside mentioning Adam Smith:

“And while Jesus berated those who worship money, or mammon, most contemporary "conservatives" embrace free-market capitalism and the accumulation of wealth with almost religious fervor, as if Adam Smith's "invisible hand" is God's hand.”

Not too clear what point I should make about this because there is a debate among Smithian scholars on the alleged religious implications of the metaphor, the invisible hand. For example in his unpublished PhD thesis Andy Denis, 2003 Chapter 4: ‘The invisible hand of God in Adam Smith’, Denis asserts that the metaphor had religious significance (http://www.city.ac.uk/economics/staff/denis/default_print_1_1077_1077.html).

I am reading currently a new book by Jerry Evensky, “Adam Smith’s Moral Philosophy: a historical and contemporary perspective in markets, law, ethics and culture” Cambridge University Press (ISBN 0-521-85247-1). It is excellent and joins recent books by Sam Fleischacker (Samuel Fleischacker, On Adam Smith's Wealth of Nations: A Philosophical Companion. Princeton: Princeton University Press, 2004 (ISBN: 0-691-11502-8) and J. Otteson (“Adam Smith’s Market Place of Life”, Cambridge University Press, 2000 (ISBN: 0521016568) as signs that scholars are questioning accepted views on Adam Smith, and are correcting many of the false interpretations that make up his lost legacy.

Jerry Evensky also enters the debate about the religious influence in Adam Smith’s work, basically saying Smith was a ‘Deist’. While I have not yet completed reading Evensky’s book (I received it only two days ago), I intend to enter the debate from the contrary point of view, partly set out in my Adam Smith’s Lost Legacy, 2005, Palgrave Macmillan, (ISBN 1-4039-4789-9), Chapter 8: “The religious climate” in Smith’s day. I think many scholars underestimate the importance of religious censorship and the persecution by zealots of those deemed to be 'unsound' on Biblical doctrine and their effect on how people expressed themselves.

Invisible Hand no 24

In the Tapei Times today there is an article without a bye-line of the author. It appears to be from the New York Times, 30 October, 30 October, page 12: see: http://www.taipeitimes.com/News/bizfocus/archives/2005/10/30/2003278045

It is headed: “Nobel-winning economist looks beyond the invisible hand” and the following paragraphs are included in what is, otherwise, an interesting read about aspects of the work of Thomas Schelling, an economist who was awarded the Bank of Sweden Nobel Memorial Prize in Economics this month (thoroughly deserved, I might add, for his work in games theory).

“Thomas Schelling studied Adam Smith's ideas, and now his findings have significantly changed the way economists think about competition and social welfare.

Adam Smith's celebrated theory of the invisible hand is the idea that individual pursuit of self-interest promotes the greatest good for all. When reward depends primarily on absolute performance -- the standard presumption in economics -- individual choice does indeed turn out to be remarkably efficient.

But when reward depends primarily on relative performance, as in hockey, the invisible hand breaks down. In such situations, unrestricted choices by rational individuals often yield results that no one favors.

The invisible hand assumes that reward depends only on absolute performance. The fact is that life is graded on the curve.”

With no blame attached to Thomas Schelling, the author manages to make several errors in respect of Adam Smith.

Adam Smith did not have a “theory of the invisible hand”, celebrated or otherwise. This is an invention of modern academe, the evidence for which is pure serial repetition by economists who have not read him, but who have, instead, taken this common attribution to be true merely because their tutors told them so.

Smith’s used the invisible hand as a metaphor and he used it only once in “Wealth of Nations”. It was never “theory” but as a once only illustration of how human motivations can have unintended consequences, which, in the case he was discussing, were, happily, benign consequences. He did never made it a general rule that “the idea that individual pursuit of self-interest promotes the greatest good for all.”

The pursuit of self-interest could just as easily promote malign unintended consequences, and a moment’s thought would suggest why, that this is the case. ‘Merchants and Manufacturers’, wrote Smith, tend, wherever they can, to promote monopolies and reductions in supply to raise prices against the interests of consumers. Self-interest does not automatically, or via an invisible hand, promote “the greatest good for all.” It all depends, and because it depends, on the circumstances, Smith did not make the metaphor into a ‘theory’. That is an inaccurate exposition and not Adam Smith’s.

Anyway, the metaphor was originally Shakespeare’s from Macbeth: 3:2 (“thy bloody and invisible hand”).

Unwittingly, the author of the article understands this (I am sure Thomas Schelling does). He or she distinguishes between ‘absolute’ and ‘relative’ performance in Hockey. By 'absolute' is meant what everybody might do (because they are compelled somehow but otherwise do not) and by 'relative' is meant what some individuals might choose to do because they value one outcome – safe play – over another – winning.

This distinction is close to Smith intended point: if everybody pursued their own self interest without detriment to anybody else’s (a big 'if' and one that never escaped Smith's attention) then doing so by everybody would promote “the greatest good for all.” But humans do not play the game this way, either in society or hockey. Smith knew that and his analysis never concluded that they would. It may be that something absolute like this is "the standard presumption in economics", but it never was a presumption of Adam Smith's, so whatever Schelling went 'beyond' it was not away from Adam Smith. It could more correctly be seen as a 'return' to Adam Smith's approach.

I believe this interpretation of Smith’s single use of the invisible hand metaphor is closer to being correct than it being a 'theory' as reported in today's the New York Times, via Tapei News.

Adam Smith and the US Declaration of Independence

J. G. Vassallo writes an excellent article, “Where do we go from here?”, in Malta Independent On Line (The Malta Business Weekly, 29 October, St Julians, Malta), while discussing a brief recent history of political affairs in the island of Malta and the problems created by its governments.

His answer to his own question, “Where do we go from here?” is a lovely link between Adam Smith’s “Wealth of Nations” (March 1776) and the US “Declaration of Independence” (4 July 1776).

I am not sure whether Jefferson had a copy of the “Wealth of Nations” in time for it to have influenced his drafting of the “Declaration”. The relevant chapter could have been “Of Colonies” (Book IV, Chapter vii), plus many comments on mercantile policies, but the timeline looks tight to get copies from London to Virginia and for them to be read in the midst of all the other things that were occupying Jefferson’s mind in those weeks before the Second Continental Congress adopted the “Declaration” on behalf of the 13 colonies.

However, Jefferson would certainly have been aware of reports of Smith’s general views before they appeared in “Wealth of Nations”. Benjamin Franklin met Smith and it is reported that Smith showed him chapters from the manuscript (1775), but whether Jefferson “borrowed heavily” from “Wealth of Nations” is probably overstating the case. That the sentiments of the “Declaration” and Smith’s works are of similar vintage is at least a reasonable assertion without implying conscious borrowings.

Here is how Vassallo presents his peroration:

“It has been said that some fetters make us free, such as the moral law that lies at the core of contracts, and sound natural law, embodied in a wise government, based on consent of the governed.This encapsulates the aspirations of a growing number of Maltese citizens disillusioned by the government’s recent performance. People are asking: “Where do we go from here?”When Thomas Jefferson penned his revolutionary declaration on the inalienable rights to life, liberty and the pursuit of happiness in 1776, he borrowed heavily from another revolutionary document of that same year: Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations.

Smith’s ideas were every bit as astounding as Jefferson’s. Because, while Jefferson believed that men were not made to live under tyranny, Smith declared that men were not made to live in poverty.

I submit that this is a good answer to the real, present-day aspirations of the Maltese electorate."

"Iron Curtains?"

John Zmirak in FrontPageMagazine.com (edited by David Horowitz) writes on illegal immigration into the USA, “Securing America’s Borders (Finally)”, 28 October 2005 http://frontpagemagazine.com/Articles/ReadArticle.asp?ID=19972

“As corporations have been driven by short-term numbers such as quarterly growth in stock price or earnings, longer-term investments and social responsibility have been almost forgotten. It’s refreshing to visit Starbucks for a coffee – knowing that the company provides health care and 401k plans for its part-time workers. Why? Because its founder, Howard Schultz, has a conscience; he was inspired to found his company by reading Small Is Beautiful, penned by the Catholic social philosopher E.F. Schumacher. Similar sentiments can be found in the work of free-market stalwarts Adam Smith and Wilhelm Röpke, who knew that a free society and free economy depend on social stability and the hope of upward mobility for one’s children.”

This sensible slant is a part of John Zmirak’s trenchant case against illegal immigration. Presumably he supports legal immigration, though much of what he reacts to would apply, though on a lesser scale from legal immigrants from poorer countries replacing American unskilled workers. However, I won’t go there as the internal affairs of another country are not my business, except to say that for the UK, I am relatively unconcerned about immigration, legal or otherwise, because on balance it is a positive fillip to economic growth and stability.

Nice, though, to see Adam Smith in his proper place: “in the work of free-market stalwarts Adam Smith and Wilhelm Röpke, who knew that a free society and free economy depend on social stability and the hope of upward mobility for one’s children.”

Where immigration becomes a law and order question, the remedy is to rely on legal norms to deal with such problems, from custodial sentences through to deportation. The latter sentence is not available to the domestic miscreants from gangster, criminal or ‘under class’ participants. Education for the children of such parents is another part of a remedy for the next generation.

Where immigrants and the children of immigrants invest in their human capital (which may mean seeking employment in low wage sectors to gain a toehold, as exemplified in Hong Kong for many years, and for the accumulation of frugal savings, to invest in the education of the children, to gain places in higher wage sectors) they add value to the country that adopts them.

There is something uncomfortable with forming an ‘iron curtain’ at borders to keep people out, having recently got rid of the original iron curtain in Soviet Russia to keep its people in. Most of the 9/ll terrorists entered the USA ‘legally’ and the British version 7/7 terrorists were born here; some of the people captured in Afghanistan were US born citizens.

The Relevance of Adam Smith vs the Irrelevance of Karl Marx

V. Sundaram writes in News Today, India, an article explaining “Why I am Not a Marxist” (http://newstodaynet.com/28oct/ss1.htm):

“In these days of globalisation and privatisation, Karl Marx is as irrelevant as Adam Smith. The great capitalist barons of the past have no counterparts today. The real owners of our public limited companies and giant corporations, the millions of stock-holders, play no roles in managing these oligopolies. The big firms are in the hands of professional managers and technical experts whose names most stock-holders would not recognise if they heard them. Although on top levels the pay of some executives may be large, yet the principal motive is to keep the company alive and growing. They maximise profits not for themselves but for stock-holders, for those whom Galbraith described as 'the unknown, anonymous and powerless persons who do not have the slightest notion of whether their profits are, in fact, being maximised'.

There is no way to eliminate these impersonal behemoths unless you also wish to eliminate such things as cars, telephones and cell phones, television, air-conditioners, washing machines, airplanes, and modern weapons of war. And there is no way that the techno-structure can function without managing prices well enough to avoid the chaotic short-term effects of numerous parameters that are inescapable aspects of the real world. Yes, monopoly competition of a sort still prevails aluminium vs. steel, wood and glass vs. plastics, one brand vs. another brand in the world of consumer durables and so on and classical competition is still vigorous on lower levels of the economy but within the techno-structure the picture is a far cry from the simple free-market capitalism of Adam Smith.”

The rest of the article is about what Sundaram asserts was wrong with Karl Marx and Vladimir Lenin ,and their modern representatives among the various Indian Communist Parties, one of which in government does not appear to be very sympathetic to other communists trying to induce high-tech workers into trade unions in case they frighten away foreign investment!

For “Lost legacy” our concern is with what he says about Adam Smith. His opening line that “Karl Marx is as irrelevant as Adam Smith” is intriguing. In terms of the reduction of mass poverty in India, I would have thought Smith’s critique of mercantile policies, such as import and export duties, overly bureaucratic regulations, red tape and licences, would make him very relevant. The degree to which Smith’s free market policies have been adopted within India is directly related to the upsurge in growth rates and the reduction of poverty by bringing hundreds of thousands of workers families into paid employment.

Again, this is a sign of the relevance of Smith. That even communist managed states in India are vying for inward investment (sans trade unions) suggests Smith is replacing Marx as their guide to economics.

As Smith knew nothing about capitalism as it developed in Britain and elsewhere in the 19th century the reference to the “simple free-market capitalism of Adam Smith” is irrelevant, but Smith’s simple market economics of a commercial society is highly relevant.

Links Between Growth and Moral Behaviour

Michael Mandel of Business Week Online, 7 November 2005 (they always print ahead of the publication month), reviews Benjamin M. Friedman’s new book, The Moral Consequences of Economic Growth, Knopf (592 pages for $35): “What’s So Good About Growth”.

Note this is a statement, not a question, which is remarkably mature for a subject that attracts a lot of silliness from people who a) either have plenty of material goods and benefits and want growth to stop, or b) do not realise to what lives of abject poverty they are condemning other people, towards whom they would normally exhibit some sympathy.

Michael Mandel writes:

“The title of Harvard University economist Benjamin M. Friedman's new book, The Moral Consequences of Economic Growth, might seem a bit off-key. After all, politicians and economists typically focus on the material benefits of growth -- more and better jobs, higher gross domestic product, larger incomes, and more money available for government programs. And companies such as Wal-Mart Stores Inc., typically point to economic benefits, such as low prices for consumers and jobs for workers, when they want to justify their business policies.But the narrowness of the public discussion is exactly what Friedman wants to address. "Our conventional thinking about economic growth fails to reflect the breadth of what growth, or its absence, means for a society," he writes. "Growth is valuable not only for our material improvement but also for how it affects our social attitudes and our political institutions -- in other words, our society's moral character."

The real benefit of growth, Friedman argues, is that it encourages a wide range of social virtues, including dedication to democracy, tolerance of diversity, social mobility, and commitment to fairness. By contrast, he writes, "when living standards stagnate or decline, most societies make little if any progress toward any of these goals, and in all too many instances they plainly retrogress."

The lack of a direct link between personal satisfaction and the level of GDP per person seems to undercut the purely economic arguments in favour of growth. After all, why should we undergo all the turmoil of technological change and economic restructuring if more gadgets and bigger homes aren't going to make us happier in the end?Friedman argues that economic growth has a key additional benefit: As long as people see their own income rising, they worry less about doing better than others. And that in turn creates a more favourable environment for political and social advances. To demonstrate this point, he draws on economic studies and historical examples, both American and global. In the 1700s, he points out, it became accepted that the rise of commercial and trading activity was a force for positive legal and institutional change. Adam Smith, for one, believed that moral progress went hand in hand with economic progress, as voluntary exchange replaced the use of force.”

Friedman hits the nail on the head, as we say. For a change, it is an absolutely accurate use of Smith’s name on this topic. Smith, a moral philosopher, linked the growth of the commercial society, i.e., his Fourth Stage of History; see his Jurisprudence Lectures (a low cost copy can be obtained from Amazon.com in the Liberty Fund series) to his theory of moral sentiments behaviours in society.

People have always lived in societies like our primate cousins, and our forebears never ‘lived by bread alone’; neither did they live alone. The choice faced by humankind, from the primitive ages of society, when they made early contact with other human societies, was between plunder and trade. In many ways that remains our choice.

Hence, the significance of Smith’s opening chapters of “Wealth of Nations” on the division of labour and the propensity to ‘truck, barter and exchange’, a theme I covered in my talk this week to a public audience at the National Gallery in Edinburgh (read it on the Articles button on the left).

Invisible hand, no 23

The Washington Post runs an article, “Broken Pledges in Hong Kong” by Kin-ming Liu, October 28, 2005, which contains the following:

“Actually, Hong Kong was, in a way ruled under a "one country, two systems" formula by the British, too. British governments followed socialist policies at home for decades after World War II, but in Hong Kong they gave free rein to Adam Smith's invisible hand; Hong Kong has often been called the world's freest economy. But the post-1997 government, despite paying lip service to free-market principles, has undermined this cornerstone of Hong Kong's past success.”

“Adam Smith's invisible hand”? Surely not. They stepped back from interfering in commercial markets, may be, but how did Shakespeare’s invisible hand (Macbeth, 3:2) get into the act? How do you summon an invisible hand and what does it do that isn’t already done by markets?

Smith’s use of the metaphor once in “Wealth of Nations” and once in “Moral Sentiments had little to do with how markets work. Smith certainly did not include an invisible hand working in the markets he analysed. His use of Shakespeare’s metaphor (“thy bloody and invisible hand”) was about the unintended outcome of human motivations. In the case of “Moral Sentiments” it was about the Feudal Lords making a similar distribution of the products of agriculture to their retainers and serfs as would be distributed if all the land was shared equally, and in the case of “Wealth of Nations” it was about the private motivations of traders preferring to keep close to their capital stock by placing it locally and not abroad. Neither is to do with how free markets work.

Smith and the invisible hand are locked together in the minds of many commentators who call on his name to illustrate their articles and speech. It has become the icon of smithian references; readers and listeners nod sagely in recognition of Smith’s name. Fine, but don’t let us accept that markets, well understood by Smith and many others of his contemporaries and certainly by all modern economists, have any ‘miraculous’ features, or invisible hands or Gods, in them.

That is a form of paganism, which, after all, was the context of the first of the three times he referred to an invisible hand in his essay on astronomy, published posthumously in 1795. In that essay he referred to the ‘invisible hand of Jupiter’ – the Roman god, not the planet – in that part of his discourse where he discusses ‘pagan superstition’ and the belief that human lives were ruled and ruined by invisible gods that nobody has seen, or can ever see.

On Kin-ming Liu’s ‘one country, two systems’ allusion to Britain’s relations with its former colony, Hong Kong, I found that suggestion most interesting and worth reading.

Ill Read by Candlelight

When modern day commentators speak with conviction about Adam Smith’s views on capitalism they are out by a hundred years or more. Of course, most of them (and most economists, too) have not read Smith’s “Wealth of Nations” (1776), and most of them have not even heard of Smith’s “Theory of Moral Sentiments” (1759), let alone read its contents. It is most likely that such people, blithely talking about Smith’s alleged status as the ‘Father of Capitalism’, have no idea about life in the mid-18th century and just how bereft it was of all the products (and services) which are taken for granted in most households (even the poorest). What products they used came not from capitalist enterprises, capitalist retailers or capitalist wholesalers, but from individual, often local, trades people, usually only marginally better off than their customers.

Among the 21st century’s disregarded, but absolutely ubiquitous, taken-for-granted product is electricity. Its most common use is in lighting a home. Walk in, switch on, and forget about it, until time to switch off and go out or got to sleep.

Fiona Houston writes a most interesting piece in The Herald (Glasgow, Scotland) “The light that never goes out”, which is on a feature of daily life in the 18th century (and most of the 19th century, and among poorer families well into the 20th too). She refers to candle light. She writes about how candles were made and used, how they worked, how they were taxed by nosey excise men, and how they were marginally better than total darkness, and terrifying to imaginative children send to bed in the dark. She also reveals something about her regular use of them in her life today.

In summary: Fiona Houston’s article is well worth a read by anybody blasé about the boring consumer opulence of his or her modern life:

"The waning of the light fills me with gloom. At the start of the month I could still cook in the twilight. Just a few days later I needed a candle. During the summer, living out of doors much of the time, I was burning very few. Now I'm forcibly reminded that winter evenings require four if I am to enjoy a reasonable level of lighting.

My understanding of "reasonable" is generous by eighteenth-century standards. Candles were largely home-made from tallow. The process is messy, long and tedious. The results were carefully husbanded to last through the dark months. Even the gentry did not waste them, and certainly not on children....

That lamp would have been a crusie. Paraffin was not available and lamps were still of the primitive, boat-shape that had been used since time immemorial. It would probably have burned whale oil…It has a raised channel on which to place the wick, made from the pith of the bog rush.

First I must extract the pith. I had done it before but had forgotten the trick. I had to consult my mentor in these matters, Patrick Cave-Browne. He is probably the most knowledgeable person in Scotland about all things relating to combustion: a regular fire-wizard. It is Patrick who lent me his tinder box. He not only showed me how to strike a light with a flint on steel, but has come at intervals with new flints to replace the blunt ones... He has made candle moulds for me and initiated me into many arcane (and smelly) processes.

Dipping rush-lights requires a deep cylinder of melted tallow. I had to beg more fat from the butcher and render it down slowly in my big pan over the fire. You add some water and just let it stew for hours, a stinking business. Then you extract the membranes and stringy bits and let the mass cool, breaking the fat off the top of the liquid. It's clean and white and keeps for ages. I made pairs of rush wicks and dipped one in each tube, bringing them out to hang over two nails while the next and the next went in. By the time six pairs were hanging on my rack of nails (made by Patrick, of course), the first was cool enough to dip again. Working outside, the tallow cooled sufficiently quickly to make good "dips" after 10 immersions in the tubes. But these had to be topped up repeatedly, so there was lots of dashing in and out of the cottage with a pan of hot tallow. Working inside more dips were needed and the whole place reeked.

… you have to be vigilant to move the stub as it nears the twig or you would set the holder on fire. That makes me reflect on how static people were. Once the lights were lit you were at home, in one room and that is where you stayed. You would see whether a wick needed to be trimmed or a rush-light moved up in its holder. You wouldn't go off to another room, or if you did, you would take the light with you.

Candles burn for three to six hours, depending on the type of tallow (beef or mutton) and the size of the wick. Patrick has kindly made me two moulds but production is slow. They take hours to cool so only two candles can be made at once. It's best to do it at the same session as rush-light dipping, when there's a tallow pot on the fire for some time, otherwise the heating and reheating of the fat gets tedious. At least I don't have the added problem of secrecy. Candles were taxed, so moulds were hidden away and used in private, in the hope that neither the excise man nor a busybody neighbour would see.

Seeing, of course, is what it's all about. I ran tests on my means of lighting. I can read by a modern candle, though it's easier with two. It is more difficult with a tallow candle and even more so with the smaller flame from a rush-light. It's impossible with the light from a crusie. .. One evening, when the fire was low, I tried living by its light alone. The glow was enough to help me cross the room without bumping into things. But the corners were in deep shadow. Trying to cook close underneath the lamp taxed my patience. Yet this was how most houses in Scotland were lit for generation after generation.

I sat in the semi-darkness that night, watching the small but steady flame, and thought about people in the past. They had to read by the smallest of lights. But read they did. Two hundred years ago there were many more literate folk in Scotland than in England. Dorothy Wordsworth was surprised by several well-read Lowland cottagers. Eliza Grant mentions Highland saw-millers, a man and a boy, who busied themselves reading the classics and geography as they waited for a log to travel through the mill. All those Enlightenment figures, too, from Adam Smith and David Hume, sons of lairds, to the poets Robert Burns and Robert Fergusson, both from poorer homes, all of them had to spend many months of the year reading by candle-light, rush-light or crusie. It's easy to overlook what a challenge this represents.

And fire light, too. It's a winter pleasure of mine to take away the girdle and pot and let the flames climb a little. The flickering light chases away the inner gloom as well as the darkness in the room.”

Read Fiona Houston’s article on life by candlelight in today’s Herald (Glasgow, Scotland, UK) at: http://www.theherald.co.uk/features/49685.html and re-think, if you need to, just how different the inconvenience of daily life was for those writing without electricity in the 18th century before capitalism.

Smith and the Founding Fathers

In two short paragraphs, Erick Galindo, writing in TalonMarks.com (Cerritos college news on the web, Norwalk, California), manages to misrepresent Adam Smith’s legacy twice:

“Governor Arnold's indecent proposal”

‘Adam Smith may sound like an average name, but the man was less than average. His "Wealth of Nations" created the basic laissez-faire philosophy of free enterprise.

Smith had "an invisible hand" in shaping the United States' capitalistic policy.’

This is common fare on some campuses, where tutors have learned the errors from their tutors (and so on, close to ad infinitum).

For the record: Adam Smith did not create ‘basic laissez faire philosophy’. Laissez faire was first advocated by some French economists before Adam Smith; he met with them, listened to their views on laissez faire, and disagreed that it was safe to let ‘merchants and manufacturers’ completely free because of their unwelcome tendency to form monopolies, restrict the market and exploit consumers. Smith believed that competition is the best discipline to prevent such laissez faire outcomes.

Such misled authors as Erick Galindo can hardly mention Smith (the rest of whose article on its subject meets standards of accuracy) without the obligatory linking of Shakespeare’s metaphor of the invisible hand to Adam Smith (as if their readers would not know whose name they were invoking). Smith’s influence (not completely certain, though evidence is present that he was read by some of the Founders), on the United States in its early days had little to do with the use to which his name was put in the mid-19th to 20th centuries.

What the invisible hand (as used once by Smith in “Wealth of Nations”) had to do the “United States' capitalistic policy” is anybody’s guess because nothing Smith wrote about in the mid-18th century had anything to do with ‘capitalism’, as it developed in the mid-19th century.

Frederick List not Adam Smith!

Doug Brandow on Reasonline.com (‘free minds and free markets’) under the heading ‘A Capitalist Peace: markets, more than democracy, may be the key to preventing war’.

It begins: “…new research suggests that expanding free markets is a far more important factor, leading to what Columbia University's Erik Gartzke calls a "capitalist peace." It's a reason for even the left to support free markets.”

The thesis about markets versus democracy and peace is worth considering, but the use of words like ‘capitalist’ raise other questions, well rehearsed here.

Brandow continues:

“The capitalist peace theory isn't new: Montesquieu and Adam Smith believed in it. Many of Britain's classical liberals, such as Richard Cobden, pushed free markets while opposing imperialism.”

This is problematic. Given that ‘capitalist’ was first used in 1792, how did Smith ‘believe’ in it?’ (he died in 1790), let alone Montesquieu (‘Spirit of the Law’, 1748)?

"President George W. Bush's foreign policy is predicated on the idea that spreading democracy will discourage war. But new research suggests that expanding free markets is a far more important factor, leading to what Columbia University's Erik Gartzke calls a "capitalist peace." It's a reason for even the left to support free markets."

Brandow almost gets the association correct between commercial markets and peace:

“The shift from statist mercantilism to high-tech capitalism has transformed the economics behind war. Markets generate economic opportunities that make war less desirable.”

We can agree with that – so could Adam Smith. The gap between ‘statist mercantilism’ and ‘capitalism’ (first used as a word in 1854) was well past the time of Adam Smith and Montesquieu.

Brandow could have referred to Frederick List’s work, “The National System of Political Economy” (1856) which argues his case for him, if only negatively: a shrill case against Adam Smith on free markets and free trade (with Smith’s well known caveats to the fore to show his ‘hypocrisy’) and the case of a German unification along pure nationalist lines which were to become embedded in the national consciousness of the German states, well articulated by List.That democracy does not guarantee peace is unarguable; that free markets do it better is accepted. That this had anything to do with Smith’s analysis of commercial markets (NOT capitalism!) is problematical to say the least.

Pleasing Reception to Talk on Adam Smith's Lost Legacy

I went along to the National Gallery of Scotland to give today's talk on Adam Smith's Lost Legacy expecting a couple of dozen or so attendees, perhaps there by mistake thinking it was to be an 'illustrated lecture' as advertised in the Gallery's brochure.

The surpirse was that the Lecture Theatre filled up from ten minutes to go until well over a hundred people assembled in the plush surroundings of the Hawthenden Room and paid, largely, attentive notice to my speech, illustrated with only two slides of likenesses of Adam Smith. The rest was a 45 minute talk on Smith's philosophy from 'Moral Sentiments' and "Wealth of Nations", their links and how the set of impartial spectators, the impartial competitors and impartial jurists made Smith's a major contribution to the Scottish Enlightenment. The talk is posted under "Articles and Press" here. It is based on my talk to the InnerPeffray Libary on 12 October, with changes and clarifications.

The questions were excellent examples of people absorbing what had been done to Smith's Legacy, his moral philosophy and, yes, one on Shakespeare's invisible hand! I think the majority of the audience were unacquainted with Adam Smith and I hope the talk provokes some of them to find out more. Certainly, I think there is a rich seam of interest (and pride) in the Enlightenment and this augurs well for future attempts to make more of Edinburgh and Glasgow's contributions to that period (1740-1790).

More Criticism of Corporate America

Bernard Rapoport, a member of the Board of Contributors - Central Texans who write columns regularly for the Tribune-Herald - is chairman emeritus and founder of American Income Life Insurance Co. He wrote an article “Andrew Jackson, where art thou?”, on Sunday 23 October in Wacotrib.com (Waco Tribune-Herald)”

“President Jackson: He liked rugged individualism and capitalism. Then again, he wasn't worried about the smooth polish of moneyed society. He would denounce today's CEOs getting $5 million, $10 million or even $50 million bonuses, sometimes for performances that aren't even satisfactory.

How can such a thing happen? The board of directors authorizes it. The money doesn't come out of board members' pockets. Stockholders pay for it.
Adam Smith, the father of theoretical capitalism, perceived that competition would be the regulator of such matters.

Smith never came to grips with the possibility of monopolism. But I think he understood the problem when too few have too much and too many have too little.”

Seems there is a distinct dissatisfaction in the US media about the state of capitalism. Add the New York Times, among many others, on the subject of capitalism and the US government, and you would conclude the level of criticism is worrying (protectionism, need for price controls, etc.,), as well as feel re-assured that democratic rights are still very much OK in the US compared to countries that murder journalists and opposition politicians who step out of line.

But Adam Smith, once again, is being used under false flags. He was never “the father of theoretical capitalism” (where do these ideas come from?). He neither knew about it nor the word itself (first used in 1854).

As for the sentence: “Smith never came to grips with the possibility of monopolism”, it beggars belief, given he wrote many thousands of words decrying the monopoly practices of ‘merchants and manufacturers’ in “Wealth of Nations”.

Assuming Bernard Rapoport looks for Adam Smith on ‘monopoly in capitalism’, he won’t find anything on the subject for Smith to come to ‘grips with’. Smith wrote about commercial markets in the 18th century, not capitalist markets in the 19th and 20th centuries. This should be obvious to the authors of such articles, just from looking at Smith’s lifetime (1723-1790). Bernard Rappoport states that “Jackson was president from 1829 to 1837” and, therefore, presumably knows that Smith had been dead for 39 years when Jackson became President.

Rappoport’s article, excepting his remarks about Adam Smith, is a strong case against what he calls ‘monopolism’ and does not need incorrect attributions about ‘capitalism’ to Adam Smith. If he wants to add to his case against monopolies and the remedy (competition, within the law and justice), he is spoilt for choice in “Wealth of Nations”.

Dealing With Corporate Theft - bankrupt the Directors!

Raymond Garcia, writing in Swans Commentary (www.swans.com) on 24 October, makes a trenchant case against Corporate entities having no restraints in the US on their conduct once they go bankrupt. Individuals are not so fortunate in escaping the consequences of their actions, he notes, because their entire assets are exposed to retribution by courts if they are deemed to have acted irresponsibly or illegally.

He quotes Adam Smith in support of his case from “Wealth of Nations”. Here is an extract (read the article too):

"Ironically, this very contradiction was illustrated in the business section of The Chicago Tribune on October 13, 2005. The top of the fold article was titled "Delphi Chief Warns Workers," in which the CEO of Delphi warned workers that if they didn't accept these radical pay and benefit cuts, they'd hire scabs or go bankrupt. Directly below it was an article about Federal Reserve Chief Alan Greenspan (ex-Ayn Rand disciple) glowingly pronouncing that the US economy was avoiding energy price-fueled inflation because of its "flexibility."

Here you have the definition of "flexibility": unfettered (by regulation) liquidity for capital and its investors; zero legal accountability for corporations who abrogate contractual obligations to real people; and a workforce of individuals forced to legally and financially bear the burden of their own demise. It's laughable that we are still regularly treated to blather from the punditocracy that we are "the pinnacle of free market capitalism."

The sainted prophet of such ideology, Adam Smith, warned in The Wealth of Nations that the power of what became monopoly and oligopolistic groups (in his day, monarchy charter entities like The East India Company and The Hudson Bay Company) would destroy the possibility of truly free markets and their social benefits, as he envisioned them. In the U.S., we ignore(d) that part of Smith's writings. We have set up corporations and their elite ownership to be insulated from democratic influence and legal accountability, and reduced individuals to the status of mere corporate supplicants. That's who we are, what we've become, in The United Corporate States of America.”

Comment:

Smith did indeed write about the pernicious effects of joint stock companies, which became the main organising entity of capitalist development in the mid-19th century in Britain and the USA. In various forms they dominate the corporate activities of most capitalist countries (all versions).

Smith regarded the inevitable fact that joint stock companies, which are necessary to raise the vast capital stock of the large private chartered monopolies of his day, such as the East India Company, would have the obvious defect that the managers of them would not be the owners because shares would be dispersed among savers, who would not be directing the business. This opened option for the Directors to act in their own, and not the owners’, interests.

Raymond Garcia focuses on the legal fact that Corporations were given a legal identity, became legal ‘persons’ in their own right, and could be sued just like an individual, the difference being that once the corporate entity is bankrupt, it ceases to exist and can no longer be sued, except that the remaining assets are used to liquidate its debts or that proportion of them that are disposable.

Smith saw the joint stock company from the perspective of the mid-18th century. He had no notion of the sheer scale of capital accumulation that became possible, or the funds that would be mobilised, from societies much wealthier in a real sense than anything known or imaginable to him or anybody around him. The records of the Chartered private companies were so bad that it stigmatised the concept of joint stock companies for him. His vision of commercial firms were smallish scale in the main, though he had access to some quite large firms and their owners, such as the Carron Ironworks, near Falkirk, under Dr John Roebuck and he knew Wedgewood in England (pottery). His entrepreneurs were independent tradesmen, journeymen, blacksmiths, iron forgers, saddlers, weavers, builders, and such like, whose capital requirements were obtained, and to be obtained, by harsh frugality out of their revenues, plus a little borrowing.

Stepping outside of Smith’s time, the expansion and legalisation of joint stock companies was inevitable. The weakness he rightly points to is glaring and, fortunately capable of some partial remedy. If the Directors or managers act in a criminal fashion, they should remain accountable, and at peril of judicial sanctions against their private property. That already happens in the UK to an extent. Moreover, if the Directors manage a pension fund for their employees, better the company manages that this at arm’s length with no borrowing from it. If they mismanage the pension fund, as they seem to do regularly, they are in breach of contract on the basis of what they promised – deferred income for a pension – they should be liable to be sued individually for this breach, and their private property put at risk.

I do not suggest that this solves all the problems, but it equalises the misery for the perpetrators with their victims. That should act as a deterrent (with close attention paid to the source of the funds with their families acquire ownership of assets in their names to keep them out of reach of creditors.

“The sainted prophet of such ideology, Adam Smith” was never linkable in any way to "the pinnacle of free market capitalism." That is a creation of those who purloined his legacy.

A "warped up Scottish economist"?

Hilak K. Sued in the Guardian, Dar es Salaam, Tanzania (ippmedia on-line edition) 23 October 2005, writes an opinion piece on the election campaign underway that shows large discrepancies between the election funding of the governing party and the opposition:

“It’s a context between riches and poverty” (see full article : http://www.ippmedia.com/ipp/observer/2005/10/23/52479.html)

In the article Hilak K. Sued brings Adam Smith into the story:

“Tanzania, they will never meet if the ongoing one-sided monetary fling is any indication. Every one can see that the ongoing contest is not between huge rally crowds and tiny crowds, between helicopters and motorcycles, or cheers and jeers. It’s between riches and poverty.

And didn’t that warped up Scottish economist, Adam Smith, say in his masterpiece Wealth of Nations, that ’With the great part of rich people, the chief employment of riches consists in the parade of riches?’ What Tanzanians are witnessing in campaign spending could claim a place in the Guinness Book of Records. We are slowly entering the big league.

At no other time in Tanzania’s history has so much money gone into circulation in such a short time.

Nobody will ever know the exact amount, but it should raise the country’s inflation rate a few percentage points.”

I hope Hilak K. Sued realises that Smith’s critical comments on the how the rich behaved were meant to be disparaging, not condoning, their behaviour.

What the author means by ‘that warped up Scottish economist, Adam Smith’ is not at all clear, though I am pleased to note that he reminds readers of the distinctive identity of Scotland (which is a step up from foreigners confusing England with Scotland) and that Adam Smith wrote “The Wealth of Nations”.

Of the rest of the article on electoral practices in Tanzania, I have nothing to say, except, perhaps it beats regimes that bludgeon demonstrators to death, run phoney elections with 99 per cent voting for government candidates and use brutal starvation policies to punish opposition voting areas.

Good News on Adam Smith Awareness

Something is definitely stirring about Adam Smith in Scotland this year. Consider:

• news that an offer was made to donate £10,000 to clean up the site of Adam Smith’s grave an embarrassing eye sore for many years);

• news that a statue of Adam Smith is to be erected by private subscription in the High Street, opposite where he worked from 1778 until just before he died in 1790 as a Commissioner of Customs, and a few hundred yards from where he lived in Panmure Close, off the High Street;


• news that a “Literary Trail”, celebrating the many authors of Edinburgh is started,including places of note related to Adam Smith;

• suggestion from the Carnegie Trust, New York, that Visit Scotland, the tourist agency,should market Adam Smith and the Scottish Enlightenment (1740-1790), rather than heather, kilts, ‘Braveheart’ and ‘Brigadoon’ type themes;

• the new further education college, formed in Glenrothes and Kirkcaldy (birth place of Adam Smith), is named ‘The Adam Smith College’ (www.adamsmith.ac.uk);

and today:

• Andrew Marr, a top flight print and television journalist is to make for the BBC a feature prpgramme (at last!) on the Scottish Enlightenment, featuring both Adam Smith and David Hume (its leading exponents and contributors).

(Modesty, of course, requires that I do not mention the publication in March of ‘Adam Smith’s Lost Legacy’ – hence, I won’t!)

News of Andrew Marr’s programme is announced by William Lyons, Arts Correspondent, in today’s Scotland on Sunday: 'We should open our eyes to our Enlightenment'. (wlyons@scotlandonsunday.com).

“THEY were the finest intellectuals of their time whose thinking has influenced the world ever since.

The leading lights of the 18th-century Scottish Enlightenment - such as David Hume and Adam Smith - laid down the founding principles on which many societies are based even now. But the valuable legacy of one of the greatest gatherings of minds in history is now being ignored despite their many achievements, according to one of Britain's best-known broadcasters.
Andrew Marr, the former BBC political editor, who is making a feature-length documentary on the Enlightenment for BBC Four, says too often it has "been pushed to one side" in favour of other periods of history such as the "Tudors" or certain glamorous "aspects of war".

Marr, who presents the flagship Sunday AM programme, said: "It is terribly sad. Edinburgh [during the Enlightenment] is a tiny little place where there is a small group of argumentative, ferociously competitive, hard-drinking, brilliant men.

"It's a bit like the moment when the French Impressionists discover each other in Paris or the moment when Shakespeare and the other great dramatists suddenly congregate in London over a period of 10 years and change world literature. Yet it is an absolutely crucial period that has been underplayed by television and film.

"When I was a student in Scotland you were expected to know about it and yet it has probably faded from people's thinking now."

The Scottish Enlightenment refers to a 60-year period in the 18th century when Scotland was benefiting from the prosperity brought by free trade within the British Empire and the introduction the first public education in Europe since classical times.

Within this period, a number of academics and philosophers including Hume, Smith, Adam Ferguson and William Robertson wrote a number of seminal works on moral philosophy, history and economics.

They gave rise to the notion of free markets, democracy under the rule of law, and individual human happiness as the measure of a society's success.
Marr said: "It [the Enlightenment] is clearly the foundation of the modern world. Almost everything we are arguing about at the moment - whether it's the religious hatred law and free speech, immigration, the movement of peoples, goods and services and what that does to national identity, or the proper limits of the state - go back to the positions first set out in the Enlightenment."

Andrew Marr's programme, which will begin production early next year, will provide a part-dramatised history of the period of the Enlightenment, focusing on Scotland's capital."

(Read the full story in Scotland on Sunday: www.scotlandonsunday.com).

Ethicists as Fanatical 'Men of System'

In ‘canadianeconoview’ blog, 21 October, 'Note to Ethicists - supply curve slope up':
http://canadianeconoview.blogspot.com (bookmark it!)

A piece by ‘BSF’ linking a fall in the number of donors of human sperm and eggs following an Act prohibiting anybody doing this for ‘reward’, except receipted transport expenses.

The consequences were predictable and if the intentions behind the Act were to end egg and sperm donations it has worked as elementary supply and demand economics suggests it would.
There is still a demand for such donations and, clearly, if an Act of government requires to be invoked to prevent payment for donations, as clearly, it is a case of an economic good involved, because there is evidence of excess demand at zero price.

“BSF” quotes and comments:

“The number of Canadian men and women donating sperm and eggs is dwindling to near zero because of a federal law restricting donor compensation, a new study shows. The act criminalizes the practice of paying for donations. Under the law, only expenses with receipts -- for example, taxi and parking chits -- will be reimbursed.”

BSF asks, with barely repressed irony: “So, drive the price to zero and, by golly, the quantity supplied also falls to zero. Who'd have believed it?”

BSF then takes the argument to something written by Adam Smith and rails against the authors of the legislation with a very large sledgehammer against their fanaticism (such is politics):

"Look, guys, like it or not supply curves slope up. The people who put together pieces of legislation like this one are perfect examples of what Adam Smith, in Chapter II of Section II of Part VI of the Theory of Moral Sentiments termed "The man of system":

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily andharmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

According to Smith, this type can be identified by possession of a distinct tendency:

It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them."

Comment: Well said. I agree with BSF and Adam Smith. I suspect the motives of the politicians behind this legislation.

[Incidentally, and only for ease of references for less well known passages, I would prefer to use the citation details as: TMS VI.ii.2.17: pp. 233-4, in line with the standard references to the Oxford edition of “The Works and Correspondence of Adam Smith”.]

An Anarchist on Adam Smith

Paul Bowman publishes an article, “What is Communism?” (“An anarchist analysis of the history and meaning of communism”), in Anarkismo.net, Oct 21 2005 .

In his long article, Paul Bowman states:

“Political economy begins with the work of Adam Smith in the late 17th [sic] century. Smith's "Wealth of Nations" was a project of leaving behind the religious discourse of the previous century's Civil War where political tendencies couched their class aspirations and ambitions in the language of theology. To do so he followed the enlightenment push to create a secular, rational and "scientific" discourse which attempted to avoid the murderous and indeterminable controversies of religion by reference to "facts". The aim was to determine the best course of government action or policy directed to the end of increasing overall wealth. In order to do this the challenge was to define a reliable measure of wealth or "value". Given the history of inflation, currency alone was clearly not viable as a direct measure. In the end Smith settled for a theory of value based on the amount of labour embodied in goods produced.

This was the basis of what was to be further developed by subsequent political economists such as James Mill and David Ricardo as the "labour theory of value" - that is the theory that the underlying value of that makes a given amount of grain exchangeable for a given amount of wrought iron or cloth is determined by the average amount of labour time necessary for the production of each product. The main question addressed by Smith's political economy was how changes in the distribution of wealth affected the rate of growth of the overall wealth of the nation. The main argument was that those government policies which, through taxation, re-distributed wealth from the manufacturing and commerce sectors to the land-owners retarded growth as the latter group, being unwilling to re-invest the extra income into more wealth-generating industry, simply frittered it away in excess personal consumption.

From the outset political economy was a subject with an agenda, namely that of defending the interests of the rising manufacturing classes against those of the dominant land-owning gentry and aristocracy who had a monopoly on governmental power. At the same time, through the arguments of political economists like Thomas Malthus, they argued against the effectiveness of the Poor Relief taxes the manufacturing bosses had to pay for the feeding of the poor and unemployed during periods of economic slump and high unemployment. This latter aspect came particularly to the fore in the great economic slump that followed the ending of the Napoleonic wars in 1815 [?] and the struggle around the proposed legalisation of unions in 1824.”

Comment

There are several points to be made about these extracts. It follows the norm for ideological analyses of ideas in the constant allusion to the ‘conspiracies’ of ‘collusion’ between authors, like Adam Smith, and members of a ‘ruling class’, who, secretly, control everything.

Bowman asserts that to increase “overall wealth” the “challenge was to define a reliable measure of wealth”. He chooses to call this "value", and in particular the “labour theory of value”. That assertion exaggerates the role of a labour theory of value in Smith’s arguments. Smith follows John Locke’s idea that in the ‘rude state of society’ (hunting) the prey belonged to the hunter, and this was probably true, though Smith also discusses plausibly how arguments over prey and products of gathering were also common. None of Smith's analysis of commercial society required a labour theory of value; he showed in his 'natural' and 'market' theory of prices (demand and supply!) how wealth, as he defined it, is created and distributed between rent, wages and profit. That Ricardo and Marx continued down the labour value dead-end (19th century) was their responsibility, not Smith's.

The labour theory of value became non-relevant when the production of wealth (the annual produce of agriculture, trade and manufacturing) depended on the division of labour and the ownership of property.

Measuring Smithian wealth is not a complicated process, and certainly not as complicated, vague and ultimately implausible as it became many decades later in the mid-19th century (see my review of Marx’s labour theories of value and ‘surplus value’ in ‘Capital’ in the Articles button on the left column).

There must be something paradoxical in the image Bowman presents of 18th century political economists “defending the interests of the rising manufacturing classes against those of the dominant land-owning gentry and aristocracy who had a monopoly on governmental power” and his own obvious disapproval of the same landowners, from an historical perspective, for frittering their profits “away in excess personal consumption” instead of investing it to create more wealth, the bulk of which was consumed by the labouring poor (sheer weight of numbers, not generosity)!

Smith’s trenchant critique of the agricultural owners in the 18th (not the 17th!) century was certainly aimed at the ‘non-improvers’ among them, but not the improvers and the yeoman farmers of Britain (and those in the American colonies, of whom he had great hopes – he predicted the America farmers would make their country the richest in the world by 1870 as measured by real output, not, er, ‘labour value’).

I know of no evidence that he was writing in this manner on behalf of the "merchants and manufacturers" of mid-18th century Britain (of whom he expressed his suspicions in many places in "Wealth of nations"), and he could not have been doing so on behalf of capitalists in 19th century Britain (he died in 1790). And that's the problem with conspiracy theories; they are unprovable - untestable, too! - and answer everything and nothing. Because they are asserted, it does not follow that they are true or believable, or even credible.

Two Seminars on Adam Smith

On the same day as my short talk on "Adam Smith's Lost Legacy" at the National Gallery, in Edinburgh, news of a seminar at John Hopkins University on another aspect of Adam Smith’s work:

In The John Hopkins University News-Letter www.jhunewsletter.com

Wednesday, Oct. 26 4 p.m. Seminar in Political and Moral Thought -- "Adam Smith's Critique of International Trading Companies: Theorizing Globalization in the Age of Enlightenment" will be given by Sankar Muthu, Political Science Department of Princeton University.

From his book, Enlightenment and Empire (Princeton University Press), Sankar Muthu moves his focus beyond Denis Diderot, Immanuel Kant, and Johann Gottfried Herder, to consider Adam Smith’s work on ‘empire’, with particular reference to his robust critique of the East India Company and others. This looks to be a most fruitful area of research.

From the blurb to his book, a taster of its themes:

“In the late eighteenth century, an array of European political thinkers attacked the very foundations of imperialism, arguing passionately that empire-building was not only unworkable, costly, and dangerous, but manifestly unjust. Enlightenment against Empire is the first book devoted to the anti-imperialist political philosophies of an age often regarded as affirming imperial ambitions. Sankar Muthu argues that thinkers such as Denis Diderot, Immanuel Kant, and Johann Gottfried Herder developed an understanding of humans as inherently cultural agents and therefore necessarily diverse. These thinkers rejected the conception of a culture-free "natural man." They held that moral judgments of superiority or inferiority could be made neither about entire peoples nor about many distinctive cultural institutions and practices.”

Patents are Monopolies?

The Economist 20 October 2005 on Patents and copyright protection

“The granting [of] patents ‘inflames cupidity’, excites fraud, stimulates men to run after schemes that may enable them to levy a tax on the public, begets disputes and quarrels betwixt inventors, provokes endless lawsuits...The principle of the law from which such consequences flow cannot be just.”

The Economist may have put it rather strongly in 1851, but its disapproval of patents represented conventional wisdom at the time. A century earlier, Adam Smith had described them as necessary evils, to be handed out sparingly, and many other economists have since echoed his reservations. Patents amount to temporary monopolies on useful new inventions."

My expertise is in copyrights of written Works, so my remarks need not be related to patents on inventions, pharmacological products (medicines) and, perhaps, software products. When the Copyright, Patents and Designs Act came in 1988, I was surprised to see copyright in published texts extended from life plus 50 years to life plus 70 years.

So very few published texts get past their first year of publication (95 per cent?) it seemed difficult to justify such protection, especially when the concept of moral rights was introduced to protect subsequent users from tampering with authorship or treating a work derogatively.

In a fast moving technology, such as software, why would anybody be using a piece of software 70 to a hundred and fifty years after it was first written? Software is lucky to last 18 months.

On the whole, I agree with Smith’s reservations. Anybody for continuing with the patents of James Watt?

Correct Use of Smith's Use of Shakespeare's Invisible Hand Metaphor

David James, writing in Australia Business Review Weekly, 20 October 2005, on “The cultural advantage” (‘Changing the company culture is a difficult and often indeterminate exercise, but working on the 'soft' issues can produce hard financial results’) reports on the thoughts of the chief executive of ANZ Banking Group, John McFarlane.

Read his article at: http://www.brw.com.au/freearticle.aspx?relId=15906

He concludes his thoughtful piece with, what starts out as a welcome summary of Adam Smith’s views, makes a reasonably correct and proper use (if people must) of Shakespeare's (Macbeth, 3:2) metaphor of the invisible hand (also used once by Adam Smith):

“The tenor of McFarlane's argument resembles that of another Scot, the 18th-century economist Adam Smith, who argued that the proper operation of markets is principally a moral issue, and that many of the more healthy influences in free markets are not a function of the intentions of the individual actors but rather a consequence of the underlying dynamics of the system. When McFarlane talks of the bank's "energy in the right direction", of "momentum" that is "driven down into the organisation", or "stimulating an upward movement", he is looking for the organisational equivalent of Smith's "invisible hand": the hidden influences that shape events for the collective good.”

Congratulations, David James.

Leftish Bias on US Campuses: a problem with no solution

Teddy O’Reilly, a senior majoring in history, at the University of Wisconsin-Madison, writes in his column in The Daily Cardinal, “the nation’s oldest independent student newspaper”, on “Changing Views for the Class”:

It is another political piece, somewhat controversial, because it raises issues of free speech and liberty. It opens:

“David Horowitz, the California Trotskyite who switched sides during the Reagan 1980s, has emerged as the avatar of the liberally oppressed. At his urging, U.S. Rep. Jack Kingston, R-Georgia, has proposed legislation to “project the principle of intellectual diversity” and support Horowitz’s academic Bill of Rights, a document designed to combat the classroom indoctrination perpetrated by liberals and other lefties. But getting the federal government involved in the classroom is certainly an odd way for conservatives to push increased tolerance.”

See what I mean? The details of the campaign need not detain us – you should read the report at: http://www.dailycardinal.com/article.php?storyid=961502 and make up your own mind.

Frankly, and on a personal level, I am broadly sympathetic and agree with what Horowitz complains of, because of the impression I have of US academe that there are symptoms of political bias in its campuses, which I find disturbing, though this only reverses the bias the other way from either side of the 2nd World War. However, waves of ‘political correctness’ (an infantile form intimidation) are now on a scale well past the point of parody.

Teddy O’Reilly concludes with:

“Horowitz’s plan and Kingston’s congressional resolution remain Mephistophelean remedies. Neither would grant such new-right conservatives what they seem to want—namely, more power in the marketplace of ideas. So, to quote a string of conservatives stretching back to Adam Smith, let “the magic of the market” do its work without the sort of “government regulation” that Horowitz and Kingston demand. As students (and professors), we should be suspicious of people who want to regulate us while simultaneously calling for the deregulation of their own affairs.”

I am not sure why Adam Smith is classed as a ‘conservative’, possibly a meaningless label in mid-18th-century Scotland. Most authoritative assessments would describe his politics, and certainly his instincts, as Whig not Tory. By any standards he was certainly radical (though never revolutionary) and his proposals, which he did not push as a ‘man of system’ (a term he reserved for fanatics and people of intolerant predilections). Perhaps, ‘sceptical Whig’ is a more accurate, if vague, label for Adam Smith (see Donald Winch, 'Adam Smith’s Politics’, Cambridge University Press, 1978, for the authoritative account).

Why Adam Smith is linked to ideas about ‘the magic of the market’ is another question, given that Smith was well informed of how markets work and he never suggested there was anything ‘magical’ about them. This is probably a case of the usual misapplication of Shakespeare’s ‘invisible hand’ (Macbeth, 3:2) into anything that mentions Smith’s name and markets in the same sentence.

O’Reilly is right though to draw attention to the difficulty of arguing for free speech, the removal of political bias in the recruitment of faculty and in the grading of students’ performance, while suggesting legislation to enforce what should be the ethos of what being an academic community is all about.

You cannot force people to be virtuous, a point made by Smith in his “Moral Sentiments”, and I suggest this applies to tolerating ideas disapproved of by academic biases. It remains a problem, though, that currently is a blemish on US academe.

Votes and Individual Choices

A report by Sheila Potter, “The Incumbents” in a local newpaper, Saanich News, Saanich, British Columbia, Canada ( www.saanichnews.com) is an analysis in terms of individuals in a local council and their political leanings (Left to Right). It includes this description of Jackie Ngai, which caught my attention:

“Although Jackie Ngai describes herself as a centrist, and for a brief period in 2004 wanted to run as a federal Liberal, current Saanich Counc. Jackie Ngai is the most right wing voice on council. Schooled in economics at the University of Victoria, she's been known to invoke the invisible hand of Adam Smith during her arguments. Most often, she votes in step with Mayor Frank Leonard, if not one step further right. For example, she had the strongest free-market views on council about restricting private liquor stores, saying no restrictions at all were necessary. On development issues, she falls in line with the rest of council in her approach to shaping development around urban nodes. She does sometimes irk community associations for not negotiating as hard as they would like with developers.”

It is not reported by Sheila Potter in what context Jackie Ngai invokes “the invisible hand of Adam Smith during her arguments”. I cannot see what is particularly rightwing about the metaphor of the invisible hand, nor rightwing about the issue of “restricting private liquor stores” or for “saying no restrictions are necessary”. Rightwing is a term invoked across a wide range of issues. Exponents of rightwing agendas run the full range from the libertarian (left and right!) through to the authoritarian (left and right!).

The overlap is so strong that it mocks the very terms ‘Left’ and ‘Right’, allegedly a designation to whether the French revolutionary assembly sat to the right of the podium or the left (echoes of the ‘right hand’ of God , ‘right hand man’, etc.,?).
In northern Europe (mainly in Scandinavia) there is no sense to be got from the political spectrum on liquor or alcohol. The Establishment (predominantly leftwing until recently) has traditionally been against it and has imposed state monopolies on alcohol production and sales (reaping the taxes) and has also imposed draconian fines (more taxes) on offenders of the many restrictive laws and bye-laws to do with the purchase, transport and consumption of alcohol. Is it the same in Canada, a northern country geographically?

Where Adam Smith could contribute to such debates in such circumstances is not clear. His, or rather Shakespeare’s (Macbeth 3:2), invisible hand would not seem appropriate to the hours of opening of particular stores. These are determined by a political agenda, of which I have nothing to say. If such hours are a local matter then the local people will decide; Smith’s liberty was always liberty under law and justice.

Prohibition, religious fatwa’s and personal taste apart, restrictions on alcohol consumption, like those on pig meat, fois gras, meat generally, fur coats, leather goods, ivory, rare birds’ eggs, endangered species and drugs, are, or ought to be (one does not follow the other), decided by votes in separable communities and, in the absence of votes, by individual preferences.

Testing

TEST

Technical problems caused an interruption is services yesterday, for which apologies. If this message is posted correctly then they are over.

Gavin

More on Niger’s suffocation of Smithian commerce

More on Niger’s suffocation of commercial activity on http://psdblog.worldbank.org re: the Nicholas Kristoff column, with contributions from Tim Harford:

"Niamey, Niger -- In countries like this, children end up being killed not only by malaria and measles, but also by an insistence on the six-week paid vacation.

This land of mud huts and malnourished babies is the very least developed country on the planet, but local regulations stipulate that companies must give all employees six weeks and two days of paid vacation a year. Not surprisingly, there are almost no employers in Niger...
...The minimum wage is set at $35 a month in Niger, higher than the local market level. Employees are allowed to work no more than nine hours a day, weekend work is basically prohibited, and women are not allowed to work evenings at all. Layoffs are usually not allowed.

Perhaps those rules (typically inherited from European countries during colonial days) sound as if they protect workers. But the upshot is that companies don't come to Niger and don't hire anyone they don't want on the payroll forever. So almost all people toil in the informal labor sector where there are no protections whatsoever.

The whole piece is worth reading. Kristof is doing what few journalists are able to do - see past well-meaning regulations to understand their true effects. The sad truth is that a poor country cannot just rule itself rich: regulations stipulating longer holidays and better pay will simply be
ignored if they're out of touch with the harsh reality of a life in poverty


AUGUST 13, 2005
Does Niger have a market mentality? Tim Harford The Washington Post article, The Rise of a Market Mentality Means Many Go Hungry in Niger, has generated a lot of heat in the blogosphere. Here's an extract:

In a country adopting free market policies, the suffering caused by a poor harvest has been dramatically compounded by a surge in food prices and, many people here suspect, profiteering by a burgeoning community of traders, who in recent years have been freed from government price controls and other mechanisms that once balanced market forces.

I'm not going to fight any ideological battles here. (Everyone else has done that. Check out Cafe Hayek for a counterargument; Owen Barder claims the middle ground.)

Instead, I just wanted to check out the facts about these free market policies.

- It costs nearly four years' income to pay the fees required to set up a limited liability company in Niger; entrepreneurs also have to deposit minimum capital of over seven years' income.
- Niger has the most rigid employment laws in the world.
- If you want to get a loan, it costs nine months' income to set up some
kind of collateral. Coverage by credit registries is almost nonexistent.
- Trying to collect an unpaid invoice by going through the courts will take
nearly a year and cost over 40% of the invoice's value.
I wouldn't blame this red tape for the crisis, but such policies and
institutions have been shown to slow down growth, increase unemployment,
increase the size of the informal sector (where people have no legal
protections) and keep women and young people out of the labor market.

Good Sense From Cafe Hayek and the New York Times!

Over at the excellent economics blog, Cafe Hayek, Don Boudreaux, posts a short piece on African development in Niger, recently in the news for gross malnutrition appearing. I post it here because it deserves the widest readership.

This 'debate' is on (the main) part of the problem: the lack of commercial enterprise. The need for a society to move to the commercial age ('at last') was a prime theme in Adam Smith's "Wealth of Nations" and in his "Lectures on Jurisprudence".

From Cafe Hayek Blog (www.cafehayek.com):

"Nigeriens Kept Poor by Government
Don Boudreaux

New York Times columnist Nicholas Kristof has more insight and wisdom in his column today than you'll find in any fifty randomly chosen volumes on economic development or in any pronouncement whatsoever on poverty and "foreign aid" by Jeffrey Sachs.

The people of Niger are poor not because that country is densely populated. (It's not: it's population density is nine persons per square kilometer.) They are poor not because of drought; not because they lack resources; not because Americans and Europeans are rich.

They are poor because, for example, local regulations stipulate that companies must give all employees six weeks and two days of paid vacation a year. Not surprisingly, there are almost no employers in Niger.

Commerce is the foundation of civilization, the font of prosperity, and the key to peace. Niger's government -- either because of foolishness or evilness (take your pick) -- squashes commerce in that country. No amount of aid, mosquito nets, op-eds by Sachs, or serenading of Bono and Paul McCartney will do Nigeriens any good until commerce is allowed to florish there.

October 17, 2005"

Bookmark Cafe Hayek. They talk good [in my view, Smithian, though they may disagree] sense over there.

Bookmark Enterprise Africa

You can keep up to date with the project "Enterprise Africa" (mentiuoned earlier) which is researching the facts about entrepreneural development on the ground in the continent. This is not a 'happy clappy' exercise in why millions, billions, should be ploughed into Africa as 'aid' (most of it wasted by bad governments), but is an attempt to find out the extent to which local obstacles are in the way of 'bottom up' economic development and what can and should be done about it.

Book mark: EnterpriseAfrica@mercatus.org and read for yourself. I do not claim that this is the answer to all of the problems of a continent, to which rightly there is much goodwill, but everything else seems to have turned to sand.

Errors at The Economist via the Herald

Writing in the Herald (Glasgow, 18 October) Alf Young reports on recent controversies on Corporate Social Responsibility (CSR), using an article in The Economist as the lead in. He reports:

“It went back to Adam Smith for its main conclusion”, and then repeated what The Economist said: "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest," wrote Smith, famously, in The Wealth of Nations. That regard, Smith believed, centred above all else on making a profit.”

Comment

This is the problem with using quotations from “Wealth of Nations” (1776), which usually refer to a different world to 21st century Britain. While the quotation about the “Butcher, the Brewer and the Baker” is among the most important in Smith’s book it was not strictly (even loosely) about profit or, indeed, about Smith’s alleged views on profit. It was about the propensity of humans to bargain, exchange on thing for another, though the criticism first applies to The Economist, and for the comment immediately behind it, criticism applies to Alf Young (a talented journalist with more than a smattering of acquaintance with economics, and I should say, an acquaintance with myself too).

The propensity to ‘bargain’ (the gist of the quotation and the chapter it is taken from), is about the exchange between the consumer looking to acquire ingredients for his family’s dinner (his self-interest) and the three traders whose self interest is to sell those ingredients. The issue is how they reconcile their different self-interest by the act of bargaining. This is shown conclusively from the earlier versions of this passage in Smith’s “Lectures in Jurisprudence” (as discussed in my “Adam Smith’s Lost Legacy”, Palgrave Macmillan, 2005).

The main conclusion is that buyers serve their own interests best by serving the interests of the sellers, and vice versa, and to achieve this outcome they must both modify their own self interests (offer low; demand high), analogously to an individual in high dudgeon about something, modifying their reactions by lowering its violence to the level that the Impartial Spectator can go along with (Smith’s “Theory of Mortal Sentiments”).

Alf Young continues:

"The Economist leader writer agreed. "The standard of living people in the west enjoy today is due to little else but the selfish pursuit of profit," he wrote, before concluding: "All things considered, there is much to be said for leaving social and economic policy to governments. They, at least, are accountable to voters."

Comment

If businesses are purely concerned with their ‘selfish pursuit of profit’ to the disregard of the self interests of their customers they may end up not making sales and not making profits.

Alf Young:

“But neither Adam Smith nor the Economist have stopped the cause of corporate social responsibility in its tracks. Indeed the CSR bandwagon, as its critics see it, rolls on.”

Comment

Adam Smith did not have a view on corporate responsibility (except perhaps a negative one in that he was suspicious of the motives of ‘merchants and manufacturers’ when left alone to pursue their own interests without restraint). The commercial sector in Smith’s time was a smaller proportion of the UK economy (agriculture and the State took up most of it) and in terms of GDP, it was in total not a large amount compared to the size it is today. Smith was more concerned with businesses being frugal to ensure continuing capital accumulation. We can only guess (wildly) about what he would have prescribed (and proscribed!) in terms of CSR.

Alf Young continues:

“For his part, Adam Smith wasn't arguing against profit-seekers promoting the wider public interest. Rather he was observing that, in the mid-18th century, the tradesman who single-mindedly pursued his own gain would be "led by an invisible hand to promote an end which was no part of his intention".

Smith saw these wider social dividends as the unintended consequence of personal profit-seeking.”

Comment

Smith did not make the invisible hand a general proposition. He mentioned the invisible hand only once in “Wealth of Nations” (Book IV.ii.9: p. 456) in respect of a specific incident: a business preferring to invest locally than abroad, thus adding to domestic capital accumulation which allowed the national economy to grow more quickly. Such self interest could also cause (and did!) monopolistic cartels and restraints on competition and, in turn, cause a slower rate of capital accumulation (his main concern was the growth in ‘wealth’, by which he meant real output, not box loads of money).

Alf Young ends:

“The proper business of business, as the Economist argues, may indeed be business. But times and society have changed. At the start of the 21st century it may well be that, to achieve that greater public good, Smith's invisible hand has to show itself in action on occasion.” Comment If this means CSR needs to be shown in the 21st century, fine. If Smith’s invisible hand (actually, Shakespeare’s: Macbeth, 3:2!) is required too, I cannot agree. This makes a passing metaphor into a major prescription, something not among the intentions of Adam Smith.