Wealth Creation is the Main Antidote to Poverty

An angry reader of the Dallas Observer reacts to news that the authorities are to embark on a campaign to drive out the “trailer trash” in East Dallas, Texas, and writes to the Dallas Observer.com a sharp rebuke and side-swipe at Adam Smith. This is an example of the damage done to the moral philosopher’s reputation by those who purloined his legacy (read it at: http://www.dallasobserver.com/Issues/2005-12-29/news/letters.html):

“Trailer-Park Blues

Out of sight, out of mind: There's a deeper issue behind the East Dallas campaign to drive out the "trailer trash" ("Board of Scrooges," by Jim Schutze, December 21), and it's one that exposes what is probably capitalism's most grievous flaw and one that may ultimately prove fatal to this kind of economic system. Adam Smith, the great capitalistic theorist, thought he had the problem hammered in "A Theory of Moral Sentiments" (along with Smith's The Wealth of Nations, one of the bibles of capitalism). Smith argued that the wealthy will always take care of the poor because their consciences won't be able to weather the discomfort of routinely seeing real want and deprivation up close. What Smith couldn't know is how effective the rich and the reasonably well off would become at avoiding anyone in poverty or genuinely modest circumstances. Call it the cocooning of the privileged. This isolation of sensitivities and sensibilities is achieved by such means as gated communities, megachurches, gerrymandering the homeless--and, of course, banishing the trailer trash. Too bad Adam Smith isn't around today; a sensitive soul in many ways, he'd probably be hard at work on a book titled "A Theory of Moral Wealth."
Dudley Lynch
Plano”

Comment
Now Mr Dudley Lynch is better informed about Adam Smith than your average person, but his information about Adam Smith must have come from an unreliable source.

Smith was not ‘the great capitalistic theorist’ and neither were his books on Moral Sentiments and Wealth of Nations in any shape or form ‘bibles of capitalism’ or bibles anything else. Those who have conflated Smith into an exponent of capitalism have him into the 19th century and not the 18th century. Even the word ‘capitalism’ was unknown in usage until 1854.

Mr Lynch may be right that people ought to take care of the poor, but whether Smith ‘argued that the wealthy will always take care of the poor because their consciences won't be able to weather the discomfort of routinely seeing real want and deprivation up close’, I am not convinced. Smith favoured a form of distributive justice, something unique in philosophy up to then.

Long before capitalism appeared on Earth the entire experience of humanity was one of abject poverty and deprivation. I think it was Tim Worstall who pointed out in his Blog recently that the dreadful condition of Africa is roughly how it was for all humanity for much of the history of the human race. As a scientific analogy it may be unreliable, but it captures an important point when we discuss poverty today (nobody is arguing, least of all Dudley Lynch, that the so-called Trailer Trash of Texas are living with lower per capita income than the majority of Africans).

Poverty is the absence of wealth and the creation of wealth is its only antidote. And I do not mean the absence of money by the absence of wealth. Money is a short-term fix for alleviating poverty. It is not a sustainable policy. Taking all the wealth from the ultra-rich (of which Texas abounds) from the entire world and handing it to the people of Africa, let alone the rest of the world, would serve no useful purpose on two counts: it would simultaneously ensure that the world’s wealth – the annual output of the wealth creating process – would begin to cease to be produced and, the knock-on effects rippling outwards into the wealth of the modest rich and then the almost rich, and on downwards through the income ranges, everybody would soon become as poor as the poorest Africans, with no hope for anybody of climbing back out of poverty.

My second count is that redistributing all the wealth of the world of all the people above average world income would not make much difference to the deprivation of those below average incomes. If these two counts are unbelievable, sceptics might ask themselves how long did it take for a section of the human race to climb out of the poverty experienced by everybody else for thousands of years before the appearance of capitalism in the 19th century?

Hence, for thousands of years the observation of poverty was the norm, not the exception. Kings, Emperors, Warlords and Princes were separated from the abject poor by armed men and they held more than an aversion to having desperately poor people nearby – they held the power of life and death over anybody they chose to chastise for whim, fancy or just for the hell of it. The idea that they ‘took care’ of the poor is a selective quotation from those who preached that they should do so – who were then mostly put to death for their pains.
Dudley Lynch asserts: ‘What Smith couldn't know is how effective the rich and the reasonably well off would become at avoiding anyone in poverty or genuinely modest circumstances.’

The ‘rich and reasonably well-off’ have families and it is from within the families that these sentiments were occasionally practiced. I have commented elsewhere that the anti-poverty campaigns are peopled by the sons and daughters of the rich, not the very poor. But the drivers of the rich (the rulers of mankind, not their sometimes wayward children), with few exceptions, have always ‘avoiding anyone in poverty or genuinely modest circumstances.’

There is a large and longstanding literary tradition that writes about these practices. People in ‘poverty and in genuinely modest circumstances’ did not wander at will into what for most of human history passed for ‘palaces’ (often not much cleaner than their subjects’ hovels) and helped themselves to an audience with the ‘prince’. They were kept out by armed guards, who were not subject to a Geneva Convention, and kept back by aggressive-minded guards when the King and his retinue passed through the country, doing whatever took their fancy, including destroying the living areas of what passed for Trailer Trash in their times, beating up anybody they took a dislike to and raping any women or girl they felt like.

Mr Dudley Lynch should wake up to the reality of human history. There has always been the equivalent of “gated communities, megachurches, gerrymandering the homeless’ and, of course, campaigns to banish the trailer trash. Mr Lynch’s Irish ancestors could have told him a lot about the whippings, transportation to the American colonies, and even hangings for those of his predecessors who were caught on or near the Lord’s land with poached game in their possession.

Adam Smith (his mother’s family were landowners and gentlemen farmers in Scotland) observed the predicament of common labourers in mid-18th -century Scotland (and those totally without paid work below them). His insight was to notice the almost imperceptible rise in real incomes underway for over 100 years in Britain and to study how this secular trend, despite all its imperfections, mal-distributed gains and selfish rapacity of the very rich, was a solution to the problem and not the cause, as seen by the ‘Dudley Lynch’ types of his day, usually of a sanctimonious disposition too.

Smith did not rush out with a manifesto and a call to arms. He studied current events in an historical context. He did not afford the luxury of a narrow vision. He wrote Moral Sentiments first, but taught its contents and his political economy and jurisprudence alongside each other from 1748 to1764, and wrote Wealth of Nations later, as he refined his concepts and validated his conclusions. He saw the need to understand what was going on around him and to make his conclusions known to a wider audience, so that they, in their own way and in their own time, and with all their prejudices and foibles he recognised without him becoming depressed, would follow their inclinations and without planning or coercion, gradually lift humanity out of the vicious spiral of endless tyranny and deprivation.

What he reported was truly momentous, namely that the course of events was gradually lifting the world he knew out of the dark ages of perpetual poverty. If this continued, then the common labourer and his family would attain the living standards they sought above mere subsistence. They were already way ahead of the living standards of the richest ‘African Prince’, who had the lives of '10,000 naked savages' at his disposal. What he could not foresee – he had no idea of the pending industrial revolution, the surge in technology, and the evolution of an entirely new economic mode, later called capitalism – was that the unprecedented rise in per capita income that accompanied these developments would set ever new standards in living standards, longevity, health and education, with each generation reaching new heights materially compared to their grandparents.

Of course, it could all revert to past norms of human civilisation and that is why he believed in quiet gradualism.

In all this there are no signs that he believed that the constants of human nature would change much, despite the massive improvement in living conditions. In one reported conversation with Samuel Rogers, a poet, in 1789, Smith, in a discussion in his ‘social hours’, referred to Ann-Robert Turgot, the French économiste, whom he described as ‘an excellent, absolutely honest, and well intended person, who was not well versed in human nature with all its selfishness, stupidity, and prejudice’ (Ian Ross, The Life of Adam Smith, page 399).

Adam Smith was never naïve or blind to what went on around him, nor to what others would or could do about it.

Invisible Hands and Other Nonsense

Paul Anderson writes in ASPEN TIMES, Colorado, USA an article, “Bumps in a Flat world”, (26 December) (visit: http://www.aspentimes.com/article/20051226/COLUMN/112260005).
Anderson writes:

“In his book "The World is Flat," New York Times columnist Thomas Friedman describes forces that are levelling the global playing field. Friedman fails, however, to mention how the world is supposed become flat without the levelling of global wealth.

If Friedman's flat world is to promote the most good for the most people, then a new economic model is needed. To end world poverty, according to Nobel Prize-winning economist Joseph Stiglitz, governments should adopt the Scandinavian model for a social democratic vision instead of relying on Adam Smith's free market.The Scandinavian model describes a welfare state with an emphasis on education, which is proven to promote fast, equitable growth. Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

I know nothing of Paul Anderson or his background, (nor much about Thomas Friedman), but I do know Anderson does not know what he is talking about in respect of economics.

Incidentally, the ‘Noble Prize’ he talks about is actually something different from the ‘Noble Prize’ of longer pedigree: it is the “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”, awarded since 1969. The winners of this prize are no less distinguished than the traditional Nobel Prize winners (awarded since 1901), but accomplished journalists are usually fussy about checking their facts.

I am always suspicious about suggestions that countries with very large populations adopt radical policies already adopted by countries with very small more easily managed populations. Given that their adoption is unlikely politically and probably unworkable politically, Anderson’s solution falls at the first hurdle of overcoming the minor problem of electoral success in the West and overcoming dictatorial impediments in the East. There is no point advocating change based on unrealizable goals, or of ignoring them and merely blaming rich western countries.

China is not going to adopt the ‘new economic model’ of Scandinavia just because Joseph Stiglitz recommends it (nor is India or anywhere else). I would guess further that not even New York City, home to his Columbia University, will adopt Joseph’s ‘new economic model’. I suspect Joseph knows this, which makes his ‘solution’ a non-starter even in his own country, let alone in the non-Scandinavia world of 6 billion other people. We can add Paul Anderson, Thomas Friedman and Joseph Stiglttz to the rest of what Smith called the world’s ‘men of system’ – fanatics who know what’s good for everybody else, but dangerous to boot if they somehow get power anywhere.

Anderson’s next paragraph is so full of non-sense (I am being polite because calling it ‘crap’ would be unscholarly):

“Smith's "invisible hand" implies that man's innate selfish nature best asserts itself in business through libertarian-anarchist, laissez-faire freedom.”

Smith’s invisible hand was a metaphor, not a theory (he got it from Shakespeare’s Macbeth 3:2). It did not imply anything about “man's innate selfish nature” (Smith rejected such nonsense in his Theory of Moral Sentiments, 1759). It is about the unintended consequences, sometimes positive, often negative, from human motivations. That is all. These were not necessarily ‘best’ asserted in business. Quite the reverse, they could be highly negative in business: pollution, monopolies, dangerous working practices, fraud, gangster-ism and political corruption.

Smith did not believe in leaving ‘merchants and manufacturers’ free to do whatever they wanted. That way led to the dreadful and appalling practices such as in the East India Company, a chartered private monopoly of execrable reputation. The adjective “libertarian-anarchist” would have meant nothing to Adam Smith (what does it mean to you: left wing or right wing libertarian-anarchists?).

As for ‘laissez-faire freedom’ that was never a view of Adam Smith’s. Paul has bought into an attribution imposed on his name by people in the 19th and 20th centuries with agendas I think you would not approve.

Paul Anderson writes another sentence, showing alarming naiveté, mixed, of course, with comforting concern for people in the developing world:

“Friedman's flat world and the expansion of technology and information he cheers are tarnished by the exploitation of cheap world labor.”

I take it he does not believe that ‘cheap labour’ can have their real living standards increased merely by paying them up to the ‘expensive’ labour of developed countries? They would sell next to nothing at such wages. If poverty could be reduced by money income transfers on the scale required politicans would print more money. Because wages are cheap it does not mean that they are ‘exploited’, though their wages may lag behind the value of their productivity. Economic growth will raise their real wages and combined with technology will enable them to sell their goods and services in the richer countires.

Millions of Chinese and Indian peasants on really low incomes are switching from the land to the cities because they can raise their poverty incomes by employment in low pay jobs from doing so. This massive population shift is bringing more people out of abject poverty into relative poverty compared with columnists paid for writing for Aspen Times, but making the absolutely better off, better educated and more healthy. They have still a long way to go to raise their wages even to the levels of those on poverty wages in the US. Affording to educate their children out of their wages is their next task (impossible before in the mud hut villages of rural China and India).

Man creates wealth (real output of marketable goods and services) and poverty is the absence of wealth creation opportunities, not its cause. Paul Anderson does not understand that yet. Stiglitz apparently does understand it because we assume he has read Smith’s “Wealth of Nations”.

Stiglitz wants to persuade (presumably) the whole world, including New York City, to adopt the Scandinavian economic model, and Paul Anderson, who apparently warns achieving even this utopia is going to be too slow, believes that Marx’s prediction that the workers will “rise up to end” their “exploitation” by “a violent tectonic drama that could level the social topography” will come to pass.

If it does, it will result in absolutely no improvement in living standards or amelioration from poverty. Markets have many faults and one precious benefit: they tend to work. As Adam Smith commented to a correspondent, who wrote in haste that the war in America was not going well for the British Crown and that further reverses would ‘ruin the nation”, he told him there is a ‘lot of ruin’ in a nation. There is also a lot of ‘ruin in markets’, but once ruined they take a long time to function again. In the meantime – it lasted 1,000 years after the fall of Rome – everybody ‘enjoys’ barbarism politically and poverty economically, until nascent markets spring up again.

Paul Anderson should contemplate these lessons of the past millennia while skiing in the exclusively rich resorts of Aspen.

Once More With Feeling

James K Galbraith contributes another article to Mother Jones, similar to the one he published in November (see archive on the right-hand column for November, which contains my initial reply to it and to comments on it by Galbraith), which he must have been pleased with because the recent article contains some of the very same paragraphs, word for word, identical to his November article. The December/January article is titled: "Smith v Darwin".

Presumably the editor didn’t notice the duplication or doesn’t mind paying twice for the same material; hopefully, for the editor and the author, readers of Mother Jones do no not mind paying twice to read nearly the same articles in successive issues, if there is enough new material to make it otherwise interesting.

In typical style, James Galbraith quotes from, "The Metaphysical Club", by Louis Menand, who asserted that “God and science really don't mix. Darwin didn't invent evolution. He invented Godless Evolution” and “the purpose of On the Origin of Species was not to introduce the concept of evolution; it was to debunk the concept of supernatural intelligence—the idea that the universe is the result of an idea."

Such sweeping summaries leave much to be desired. If Origin of Species had a purpose it was to explain natural selection as an idea and to register the claims of Darwin to have been the author of the idea based on his research in HMS Beagle. I recollect nothing in Darwins' Origin of Species about him 'debunking' God.

Darwin’s concerns were primarily about how the religious body of opinion (including his wife’s) would take to a scientific statement that appeared to call into question the Biblical teaching on the origins of humans, which is why he delayed publication of his theory until prompted, accidentally, to publish because of Wallace’s discovery of the same hypothesis and his intention to publish his ideas to the Royal Society, pre-empting what Darwin had concluded years before.

“Economists” asserts Galbraith, “on the other hand, have been Intelligent Designers since the beginning. Adam Smith was a deist; he believed in a world governed by a benevolent system of natural law. Consider this familiar passage from Wealth of Nations, published in 1776, with its now mostly forgotten anti-globalization flavor:

"By preferring the support of domestic to that of foreign industry [every individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

This conclusion is quite inappropriate, as I suggested last month in reply to the same paragraph by Galbraith. As then, I appeal to Galbraith to read the passages from which he takes his selective quotation. Smith is writing about what he considered was the ‘natural’ and appropriate evolutionary line of the development of a commercial society. From investment in agricultural improvement, he saw ‘merchants and manufacturing’ as the next destination of investment (commerce) and then in ‘distant sales’ domestically, and finally in the ‘carrying trade’ and overseas. This progression would increase domestic wealth creation first and world trade second.

All capital stocks diluted from investment in domestic output retarded domestic investment. The concept of absolute advantage, allied with the international division of labour, was at the heart of his ideas about the benefits of international trade. He was not what today is described fashionably an ‘anti-globalist’.

The reference to the invisible hand is a metaphor, not a theory of markets, nor an allusion to religion. Smith was not a deist. He borrowed the metaphor from Shakespeare (Macbeth: 3.2). It has been made a theory by 19th -, and particularly 20th -, century economists pursuing different agendas in support of the notion that any regulation of markets is not a good idea, a wholly non-Smithian policy.

That Veblen, “The greatest American economist”, turns a single metaphor into a theory, is more a comment on Veblen’s style than an authoritative judgement on intelligent design and Smith’s meaning. Apparently, Galbraith has a theory about Smith and his happy to keep repeating it. If Smith had never mentioned his single use of the invisible hand metaphor it would make not a jot of a difference to anything in “Wealth of Nations”. It was a comment on the unintentional consequences of human motivations and never a theory of how markets work (fully explained in Book I.vii).

By the time Veblen was writing (19th-20th centuries), Smithian political economy had been abandoned and the profession had moved in to economics en route to mathematics. Anything ‘sublime’ in economics had nothing to do with Adam Smith. All his works are parts of an evolutionary view of society, its growth and development. What the modern economists have made of the invisible hand is entirely their doing, not Smith’s.

He certainly centred on the individual working in concert (though not always in tune) with others to create, unintentionally, language, divisions of labour, differing means of procuring subsistence, different societal forms, the arts and knowledge, and what we call today markets. His consciousness that societies could grow and then decline; that ‘progress’ was never continuous or assured, and that they could ‘crumble into atoms’ were evidenced by hi understanding of history. For Smith, the fall of Rome was real; it showed the fragility of civilisation.

Smith taught and wrote about the fragility of human endeavours and the conditions conducive to their capacities for limited progress. He was not optimistic of the outcome; his appreciation of venality of the ‘rulers’ of mankind, the mendacity of men of influence and the ‘ignorance’ of the common majority were characteristic of his appreciation of the obstacles in the way of the achievement of his modest proposals for change.

James K. Galbraith claims to be familiar with Smith’s works. This is not yet supported by what he continues to assert about their contents.

On Managing Public Sector Strikes

Two Blogs today cover the New York transport strike and it aftermath. One is from a sympathetic union site: “Strike Postscript: In Appreciation of Public Employees by Jordan Barab, reprinted from Confined Space” (http://www.nathannewman.org/laborblog/archive/003598.shtml) and the other “Building Credibility Through Battling Public Sector Unions: The Case of NYC’s Mayor” by Matthew Kahn (http://greeneconomics.blogspot.com/2005/12/building-credibility-through-battling.html).

On Jordan’s article, I see running through it an indicator of how to bring reality about public sector remuneration strategies into perspective when they are subsidised by taxpayers: market testing by breaking their imposed monopolies with competition from both public and private operations. On Mathew’s article, I can only say: ‘Oh, dear!’ Playing winners and losers is not helpful – there is still much damage to be done by ‘after-strike disturbances’ and the Mayor’s ‘credibility’ is of trivial interest at this stage.

A reader wrote to me yesterday and made thoughtful observations and asked questions about the content of my postings, to which I have replied. The gist of my responses follow:

My experience of managing strikes from an employers’ point of view is that the unrestrained rhetoric of unthinking public officials usually makes matters worse. This is clearly the case in New York. I also base my approach on Adam Smith’s assessment of the mid-18th century situation where the circumstances of the labourers (next to no resources to stand a strike with no pay and near subsistence wages) was not favourable for them, hence the violent exchanges of, literally, desperate men, and the fact that the law was stacked against them (jail, transportation to the American colonies or, in the event of violence, hanging).

Today, these draconian circumstances do not apply in the USA, and certainly not among public employees. However, the rhetoric of desperation on both sides is only a few steps away, if translated into action, leading to the kind of behaviours exhibited by Chinese totalitarian forces recently against demonstrators in Dongzhou, which I assume all Americans (especially Mayor Bloomberg) condemn.

My comments were directed at reigning in the dangerous rhetoric of some of the players. It only exacerbates an already emotional situation and it ignores the range of commitment from militant to reluctant among the strikers to the action they have been persuaded, or forced by peer pressure, to undertake. This range of commitment is the key to undoing the strike action quickly, or quicker than the alternative.

I am aware that there are laws against transport workers striking and I consider them in all probability to be a necessary and correct backdrop to management of a public service and a factor in the situation. This does not preclude sensitive action when a wildcat strike occurs, led by a militant union leadership. When they do occur, or threaten, it is incumbent on the employers to consider carefully their best response. To defeat such strikes requires careful preparation. To react emotionally when they surprise you is not wise. Nor is caving in quickly to the union’s initial demands.

To defeat strikes requires time to the build up resources, including PR, and to this end the immediate response is to contain the dispute to negotiation until you are ready and not to be provoked into precipitate actions that create an excuse for the militants to call a strike, i.e., ‘keep ‘em talking’ until you are ready.

If a strike occurs, the closest possible working relationship between the employers and the politicos is required so that everybody ‘sings from the same hymn sheet’. No wild statements, threats and bravado, thank you. The campaign has to be managed. An ‘open door’ to continuing negotiations is paramount – this creates questions in the families and among the strikers as to why a strike is necessary – few workers like striking – and the option of continuing negotiations (unconditionally) saps morale and puts pressure on the militants, as does a judiciously timed invitation for employees to return to work of their own volition. This means maintaining the right to direct communication with all employees, including those who are members of the union. Speaking to employees only through the union leaders and the media is unhelpful – the militants never present the employers case fairly and the media is interested in advertising not the merits of what’s going on.

The deficit funding of NY Transport is an major issue and it has to be played as such. ‘Fellows, we have a problem’ is the tune to play, and the ‘we’ includes the transport employees.

The ‘illegal’ nature of the strike is not an issue – step well clear of making it one; getting them to desist from striking is the main strategic goal, without giving in (that would make the problem worse). Predictably, unions and sympathetic commentators claim that it costs money to provide safe, excellent public services and use this to defend all and any accretions in remuneration, health and pension packages. But protecting high-cost public services with monopolies and preventing private operators is not essential; even operating a public service with public officials is not essential, as Adam Smith indicated in “Wealth of Nations” (Book V).

‘Replacement bus drivers are easier to find than replacement air traffic controllers’ sounds great confrontational copy, but it devalues the worth of your employees – we want to boost their self-pride not devalue them! If public employees are told they are worthless by their employers, what have they got left but to hit hard against those who consider them worthless? The militants play to that tune (plus in NY allegations of racialism) and it hardens wavering strikers. The task is to undermine the militants, not bolster them. References to the air traffic control dispute need to be downplayed at an early stage, not mainlined – what else is it but a threat, not a strategy? For it to become a strategy it needs careful preparation, not impetuous delivery.

On the issues in the dispute I have nothing to say as I am not briefed on them. I am not expressing any views on their merits or otherwise. If the union is out of control or impossible to deal with, then prepare properly to defeat them; don’t get suckered into an ill-prepared anti-strike strategy that you do not ‘win’ whatever the outcome. The majority of a workforce are decent not militant; don’t make them militant by ill-considered outbursts, nor try to ‘buy’ them off by giving in to unsustainable demands.

That, in short, is what I was trying to say in my postings. It is a point of view at least worthy of being considered.

How to Teminate a Strike 1

CNN reports that there is a return to work of the striking transport workers, while negotiations proceed.

Is this not the better result than threats of jailing union officials, $1 million dollar fines and two days pay docked for one day’s strike?

If only employers would learn (or hire better advisors!) and union leaders refrain from exercising impetuous coercive power in pursuit of excessive promises to members.

Of course, it may still fall apart. A period of silence is advised from both sides until the discussions are concluded (NB: that includes a politicians and media commentators).

How to Prolong a Strike 2

The New York Daily News (22 December) reports (from FEE -- inbrief@fee.org):

The NYC Transit Strike in its Third Day

“The leaders of the union behind New York's crippling mass transit strike met transit authorities on Thursday for the first face-to-face talks since workers walked out on the job two days ago, local media said.” (New York Daily News)

The brute course of events in strike management often mocks the careless rhetoric of the parties. Yesterday I criticised the statement of Mayor Bloomberg that there would be no negotiations with the strikers’ union until they returned to work. Next day, the Transport Authority is in negotiations with the strikers’ union - and they are still on strike.

This, not entirely unexpected event to those who have watched the course of ‘crippling’ strikes, underlines my point about the futility of public figures making such ‘no negotiations under duress’ type statements.

Empty threats exposed as bluster and bluffs reinforce strikers’ morale and prolong the strike. Many of the strikers may be wavering in the strike decision but they are kept on message by union leaders who point to such turnarounds as evidence that they are 'winning'. Better not to give out that message.

It would have been better for the mayor, in consultation with the Transport Authority, to announce that the ‘door is always open’ to negotiations and the strike is ‘unnecessary’, etc. This undermines union solidarity and creates problems for the union leaders.

Instead, I note from the New York Times, that worse blunders were made yesterday by the media denouncing the strikers as ‘rats’! The strike leaders were quick to turn such shameful rhetoric into racial abuse, link their action to Martin Luther King and Rosa Park - what images that creates in the minds of the workforce(!) as it deepens their sense of solidarity.

Who is (mis)advising the New York authorities? What is their strategy? Were they prepared for the strike?

If they ‘win’ in these circumstances they pile up grievances and lose in the month’s ahead.

FEE adds a comment:

"What is euphemistically called collective bargaining by union leaders and pro-labor legislation is bargaining at the point of a gun. It is bargaining between an armed party, ready to use its weapons, and an unarmed party under duress. It is not a market transaction." -- Ludwig von Mises

I shall refrain from commenting on this assertion until I read more on Mises’ analysis of collective bargaining (I am now at the halfway stage through Human Action).

As for ‘unarmed’, it seems from this distance that $1 million a day fines, loss of two-days pay for everyday they strike, and threats to jail the leaders hardly warrants the adjective unarmed. The employer’s are certainly ‘under duress’, which is what strikes aim to cause, a point noted by Adam Smith in the quotation In yesterday’s post.

Smith on Strikes

Following on from the previous comments on the New York transport strike, the Fund for Economics Education (FEE: inbrief@fee.org) reports from the Washington Post reports on the recent ‘disturbances’ in China where a village in Dongzhou mounted protests (a ‘strike’?) against their various grievances. The communist authorities reacted in the usual robust manner against dissent, i.e., a few degrees further along than the rhetoric exhibited by the New York authorities. Now the communist authorities appear to have gone much further from their initial denunciations of the protesters to outright repression:

“Chinese Repressed Again in Dongzhou” ((Washington Post, Wednesday 21 December)

“Two weeks after a protest that culminated in gunfire and bloodshed, the rebellious farmers and fishermen of Dongzhou have been reduced to submission. Authorities have sealed off the seaside village and flooded its streets and lanes with police patrols, residents said, and an unknown number of men have been summoned by a knock on the door and hauled away for interrogation.”

Lest readers dismiss as total exaggeration the parallels I suggest between the reaction of the authorities in their rhetoric to events in New York and that of the communist state functionaries in Dongshou, they should consider how Smith wrote about the incidence of strikes in 18th-century Scotland:

“Such combinations (of masters), however, are frequently resisted by a contrary defensive combination of the workmen, who sometimes too, who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labour. Their usual pretences are, sometimes the high price of provisions; sometimes the great profit which their masters made of their work. But whether their combinations be defensive or offensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they always have recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who either starve, or frighten their masters into an immediate compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen. The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing, but the punishment of the ringleaders” (“Wealth of Nations”, I.viii.13: page 84-85).

The resort to the courts and the immediate imposition of $1 million per day fines on the union, the refusal to negotiate the demands of the union until its members return to work and the media pressure brought by the Mayor and others on the strikers (creating an atmosphere of vilification, justified or not) are reminiscent of the fate of strikers in Smith’s day.

Ringleaders were not just imprisoned; they could be whipped through the streets of Edinburgh and transported, up to 1783 to the American colonies and Australia thereafter, or if found guilty of violent acts (arson or murder), they could be hanged.

Hence, when we condemn the Chinese communist authorities let us spare a thought for the emotional reaction of politicians when something goes wrong with the negotiating process in New York, and let’s endeavour to keep a sense of historical perspective while we celebrate our liberties.

How to Prolong a Strike

New York is experiencing its first transport employees’ strike since 1980. Without wishing to interfere in a dispute, of which I know nothing, I want to comment on the predictable reactions of the authorities to what is a thoroughly unpleasant experience for many tens of thousands of people affected by the strike.

The purpose of any strike is to cause maximum disruption to an employer and in transport that means causing maximum disruption to citizens caught up in the effects of the strike. That is why strikes are called close to major holiday periods , or, in this case, during winter weather, or in other cases, when a construction deadline is looming (building an Olympic stadium or constructing a stage set close to opening night).

Nothing encourages the solidarity of the strike among the strikers more than visible evidence that the strike is having maximum effect. TV pictures of long queues (‘lines’ in New York), cameo tales of extreme discomfort to families, disappointed commuters, theatre goers and unfinished sites, may horrify public onlookers, but they boost the determination of the strikers. Business spokespeople claiming the strike is costing billions, politicians expressing sound-bite rage and crying babies do much the same thing.

The intention of these public statements and images are to ‘shame’ the strikers back to work. The unintentional outcome is always to boost the strikers’ morale. Those militantly supporting the strike action receive comfort from the success of their strike action (its immediate impact not the eventual outcome) and those strikers less convinced that the strike is appropriate are encouraged to hold the line a little while longer because 'the employer is bound to cave in with the evidence before them that stubborn resistance is pointless' (or words oin unions peeches to that effect).

Of course, it does not always work out like this. The conduct of the employers, politicians and authorities is scrutinized by the media and assailed by supporters of the strike and the usual sympathizers of the strikers ‘driven to strike by obstinate bosses’.

Take this report from CNN today:

“State Supreme Court Justice Theodore Jones found the union in contempt of court for ignoring two injunctions barring its workers from striking. New York's Taylor Law forbids transit workers from striking, and the city and state had pressed the judge to impose a hefty fine.

"There are no winners in the strike," Bloomberg said Tuesday. "Everyone is a loser here."
He lambasted union leaders, saying they had "walked out on New York City," and adding there will be no negotiations with the union until workers return to their jobs.”

The union is already appealing against the fine and, no doubt, adding the fine to its terms for settlement should it be imposed (a regular occurrence in Australia where included among the settlement terms there is usually 'payment to the strikers for their lost pay'). But, note the last sentence attributed to Mayor Bloomberg: ‘adding there will be no negotiations with the union until workers return to their jobs.’ It sounds great; it is no doubt sincerely meant, but is it a good move?

To the original grievances of the union, this adds a new grievance: the merits of their right to take strike action. Be sure this is not a moot debating point carefully considered by a panel of sensible onlookers. If it is calculated to weaken the strikers’ solidarity it may do anything but weaken it. Union leaders addressing the strikers can work up a lot of rhetorical mileage out of the ‘right to strike’ against ‘injustice’, and so on. Wavering strikers can quickly be brought back into line in emotional appeals to vague notions of justice.

Remember, in such conflict the object of the employers (and those opposed ton the strike) is to weaken union solidarity, not strengthen it, and this is done best by focussing on the merits of the strikers’ case and not by allowing a non-issue to bolster doubts about whether the strike will achieve their case.

Adam Smith commented on the way the 18th-century law in Britain worked against individual labourers in matters of resisting wage cuts or raising wages, but not against masters who combined together to enforce wages cuts or resist wage rises. He did not take sides specifically in any particular dispute, but neither did he hide the brutal facts. My comments do not take sides in the New York transport dispute. They comment on the public reactions by people from whom we expect a constructive response to such difficulties, but, as is usual everywhere, we get actions that are more likely to worsen or prolong the situation.

Just as it is a fundamental right in a democracy for workers to have the ‘right to strike’ it is also a fundamental right of employers to seek to prevent strike action and, in ultimo extremis, the right to seek to ‘break’ strikes that occur, provided both actions are within the law. One of the main weapons in breaking strikes is to undermine the morale of the strikers. Forgetting this usually leads to policies and behaviours that bolster the strike when different policies would unsettle the solidarity of a large group of employees whose ‘solidarity’ is thinly and unevenly spread.

Neither Smith nor Marx 'Paved the Way for Globalisation"

Dr. Ralph Lynn, a member of the Board of Contributors, Central Texans who write columns regularly for the Tribune-Herald and a retired professor of history at Baylor University writing in WacoTrib.com repeats the well worn distortion of a now famous saying:

“The “good old boys” running this show are not bad people. They are just making the mistake made by “Engine Charley,” the genial General Motors chairman of 40 years ago. He assumed that what is “good for General Motors is also good for the country.”

What Charles Erwin Wilson, CEO of General Motors, actually said is not quite what he is believed to have said in reply to a question from the Senate Armed Services Committee, if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa", (The New Dictionary of Cultural Literacy, Third Edition. Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil. Copyright © 2002 by Houghton Mifflin Company).

He was referring to an affinity of interests between the country (USA) and GM, which is not quite the same as arrogantly imposing on the USA whatever was good for GM.

Dr Lyn’s article has several ‘not quite’ right references to other matters, including the role of Adam Smith, opening with:

“More than just a bit oddly, both Adam Smith, the patron saint of big business people, and Karl Marx, whom these businesses people detest, paved the way for globalization.
In the big-business, simplified view, Adam Smith exalted individual enterprise free from government controls.”

Adam Smith as the patron saint of ‘big business’? Not something that Smith was familiar with, except in the case of the East India Company whose appalling behaviour he condemned wholesomely in “Wealth of Nations”. Smith was not a friend, never mind a ‘patron saint’, of ‘big business, a phenomenon of which he had no knowledge and did not write about.

His vision of the future was that of a growing commercial society, soundly based on an improved, and improving, agriculture in Britain. Of the United States economy he envisaged that it would be the strongest in the world, having overtaken Britain, sometime around the 1880s (Wealth of Nations, IV.vii.c.79: page 625) and would (‘should’) be based on agriculture and not industry. How Smith ‘paved the way for globailisation’ is not explained.

That Karl Marx allegedly also ‘paved the way for globalisation’ appears to depend on a spurious association of a German philosopher scribbling away and the quite separate development of capitalism:

“The Karl Marx contribution is a welcome surprise to the business people. This because Marx wrote little about socialism while discovering and praising the unequaled talents of big businesses in the production of goods and services.

Marx foresaw that the business people would reverse previous economic history: Instead of being controlled by governments, they would control the governments – all so successfully that an impressive recent study says that the entire world now shelters 587 billionaires.”

Smith, who did not foresee capitalism, and Marx, writing amidst its early manifestations, ‘foresaw’ business people controlling governments, somehow ‘paved the way’ for what happened two hundred years after Smith died and a hundred years after Marx died!

We can safely assert if neither Smith nor Marx had ever lived or written their books, capitalism would have appeared in almost exactly the same form it appeared anyway. Societies do not develop in a particular way because philosophers speculate about them. Smith, with characteristic modesty, said philosophers ‘do nothing but observe everything’, and Marx exhibited futile activism (and typical arrogance) in announcing that the task of philosophers was not to ‘understand but the change the world’.

“Wealth of Nations” was the result of observations of mid-18th-century Britain, looking backwards to the Europe of ancient Greece and Rome rather than forwards to the 19th century; “Capital” was an elaborate analysis of 19th-Century capitalism demonstrating that its author did not understand what he wanted to change.

Dr Lyn ends his piece to the theme of ‘greed’ (‘Systemic greed and inability to foresee unintended consequences’). He too is closer to wanting to change the world than to understanding it. I suggest, respectfully, that he read “Wealth of Nations” and “Moral Sentiments” if he wants to do the latter.

Read Dr Lyn’s piece at: http://www.wacotrib.com/opin/content/news/opinion/stories/2005/12/19/20051219waclynn19.html

Apologies and an Explanation

My attention to Blogging duties has been under strain last week and this (perhaps into next week too!) due to my continuing obligations since retirement from fulltime employment at the Business School in the matter of grading MBA Elective examinations in Negotiation. Near on 200 MBA students chose my Elective class this semester and I am grading their efforts, as always subject to the perusal of my work and their efforts by External Examiners from other British Universities, as is the British system - the relative autonomy of faculty in other countries is not copied in UK academe.

Hence, when I get a chance of a welcome break during the grading day - also interrupted by necessary social obligations associated with this time of year in the 'West' - I seize it to read through e-mails about Adam Smith and the ultra-useful summary of economics Blogs on Economics Roundtable (at http://www.rtable.net/index/rt/economics/recent/), the indespensable tool for all economists wishing for access to the best of economics Blogging, and select a subject for comment. All too quickly the time available slips by and I must return to grading. Fortunately, the number of articles misusing Smith's legacy has not been high this past few weeks.

Apologies, therefore, for scanty postings recently. I hope to return to a fuller programme by next week.

Any comments to: gavin [at] adamsmithslostlegacy.com

Incidently, Heriot-Watt University, where I was employed as a Professor from 1982 until March this year, has awarded me the title of Emeritus Professor. I am genuinely honoured and humbled by this unsought award. Academics, even economists, are not just driven by the mores and motives of homo economicus - and I have long doubted that anybody else is either.

Bureaucratic Barriers and Bribes in Developing Countries Cause Poverty Too

Tim Harford writes: ‘Yes we have no bananas. We just can’t ship them’, in the New York Times, 17 December. His article contains some facts that need the widest dissemination to all those concerned about the poverty of poor people in developing countries, which has nothing to do with the protectionist agriculture regimes of Europe and the USA.

Harford cites the problem of getting exports from a developing country to their borders and onto a ship to a developed county’s markets (should the developed country allow them in tariff free!):

“If our picker wants to sell his bananas abroad he first has to get them onto a ship bound for America or Europe. That takes 116 days, and an incredible 38 signatures - each one an opportunity for some official to collect a bribe. Something is rotten here, and not just the bananas.

Sub-Saharan African exporters face, on average, delays of nearly 50 days for each shipment. They must get roughly 20 signatures on eight or nine separate customs forms.”

This is a common problem with trade from poor countries, made worse by having to go through similar bureaucratic problems when exporting to a neighbouring poor country that is saddled, typically, with bribe-prone officialdom.

“India's commerce minister, Kamal Nath, has called for rich countries to "eliminate export subsidies as fast as possible." And so they should, but Mr. Nath might take note that an Indian exporter needs to collect 22 signatures on 10 documents - that puts India in the bottom 20 countries in the world for letting its own entrepreneurs trade across borders. Celso Amorim, Brazil's foreign minister, has condemned farming subsidies as "the most harmful single piece of commerce." The subsidies are indeed repugnant, but Brazilian exporters need 39 days to get their produce onto a ship, too long for some agricultural goods.”


Read the full article at Private Sector Development Blog: “a market approach to development thinking”:

http://psdblog.worldbank.org/psdblog/2005/12/yes_we_have_ban.html#more

The New Mercantile Political Economny

Tim Worstall , today’s Times (UK: 17 December), writes a barely contained blast, “Wake Up, Smell the Manure”, in a tone of well-deserved sarcasm, at Zac Goldsmith, son and heir to the Goldsmith millions. Tim asserts that Zac’s views on the declining cost of food lack intellectual content, (he certainly knows little about economic history. Zac is an ecology activist in the anti-globalist movement – a movement, we should note, that contains more sons and daughters of the western-educated, well off middle-class than it does starving poor farmers suffering from European and US agricultural protectionism (a policy they want to impose around the world into all economics sectors).

Sample this opener of Tim’s:

“THE COST of the food on your table has been falling since Neolithic times. Thanks to the onward march of technology — inventions such as fertiliser, the horse collar or exciting methods of turnip weeding — yields have been increased over the past 10,000 years, so reducing, for example, the price of each extra turnip produced.”

Zac Goldsmith concludes from falling food prices that this is a horrendous mistake and, presumably should be reversed. Tim Worstall (rightly) will have none of it. He puts it beautifully:

“Because of that the 98 per cent of us who are not farmers gain. This is as it should be: ever-greater quantities of ever-cheaper food are what have driven the growth of civilisation over the centuries. Moving from 100 per cent of the people scraping away in the fields to only 2 per cent is what has allowed some of us to become international financiers, editors of ecology magazines or the legatees of billionaires.”

We hear much the same thing from defenders of manufacturing at the fall in employment in the manufacturing sector. Yet falling employment in domestic manufacturing is not a sign of the end of civilisation, especially when manufacturing output is higher than it was. It’s a natural consequence of labour productivity. There is no ordained share of national product that must go to agriculture, manufacturing and services for all time.

In Adam Smith’s day, agriculture was around 50 per cent of national product. After Smith died in 1790, commercial society was joined to the technological revolution that turned employment from the former dominant agriculture to the new and soon to be dominant industrial sector. In the 20th century, the post-industrial era was well under way. Not surprisingly, Zac Goldsmith is unlikely to lament the decline in industrial employment. But the rise and decline of these sectors is part of the process of economic development, though Zac regrets all aspects of economic growth.

Smithian economists prefer to celebrate the shifting shares of national product. There are ‘too many’ farmers and ‘too many manufacturing jobs’, not too few. Trying to freeze employment in any of these sectors is the new mercantile political economy. Its instrument is the State; it supporters naive; its vision reactionary. Tim’s dismissive tone of Zac is exactly right.


You must read Tim’s article (at http://www.timesonline.co.uk/article/0,,3284-1922567,00.html) and also visit Tim's Worstall's Blog by clicking the link in the lefthand column.

Nothing 'Tricky' in Smith's Criterion for Public Projects

Business Day (Thailand’s Business News in English) 15 December, carries an article by Dr Biswas: ‘A cautionary tale of the role of government in commerce’.

Dr Biswas writes:

“It is generally conceded these days that free markets, the basis of capitalism, are good things. Yet, even Adam Smith, in Wealth of Nations, realised that there are limits to the social goods that free markets can deliver.

Smith suggested that the proper roles of government were in the defence of society, administration of justice, facilitating commerce and promoting the instruction of the people. … But facilitating commerce is a tricky one. What does this mean? And what should government get involved in?

Some capitalist thinkers feel that the government should only get involved in areas of market failure. This often occurs where socially essential goods and services such as education and health care must be delivered to people who cannot afford to pay market rates. In an area such as education, for example, making sure that all citizens in a country have a proper basic education has a large social benefit, yet it may be difficult to create a profitable business providing education to poor kids. Hence, there is agreement that government must be involved in the education of poor children.

How does this apply to facilitating commerce? Roads, bridges and airports all facilitate commerce, and most people would agree that government has a role in developing major infrastructures such as these.”

Comment:

It is not clear why Dr Biswas uses the phrase ‘even Adam Smith’ as if this is remarkable, when the fact is this can only be surprising to someone who has not read “Wealth of Nations” and who holds to a view of Adam Smith (as taught in Economics 101 in many campuses and endlessly repeated by journalists) that bears no relation to his Works.

Nor is it clear why ‘facilitating commerce, is a tricky one’. It was not a ‘tricky one’ to Smith and should not be to readers of “Wealth of Nations” or ‘Lost Legacy’. He is quite clear of his criterion for public investment in ‘facilitating commerce’:

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those publick institutions and those publick work which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence to any individual or small number of individuals and which it, therefore cannot be expected that any individual or small number of individuals should erect and maintain’ (Wealth of Nations, V.i.c. page 723)

What is the ‘tricky’ problem with that clear criterion? As Smith was writing in the mid-18th century his concerns about ‘individuals or small number of individuals’ was on an entirely different scale to the availability of capital for such projects in the 21st century. That does not prevent governments with vast tax raising and borrowing powers investing in public projects that could be undertaken by private companies but which they choose to undertake as publicly financed projects.

The United States has undertaken all coastal and river dredging schemes using the US Army Engineers as the state monopoly constructor and operator for decades (they built the levees that were breached in the recent Katrina incident outside New Orleans), when other countries demonstrate that the use of private dredging contractors is perfectly feasible and as reliable.

Britain’s privatised BAA, the owner and operator of the UK’s main airports and former state monopoly (now a private monopoly), can and does construct major terminals and runways using privately raised funds. Of course, BAA makes cases for access to tax payers’ funds and grants, but that it a facility dictated by government (and European Union) policy, or their acquiescence in making such funds available, and is not an economically necessary criterion in Smith’s sense. In his day, harbours, bridges, canals and roads formed a formidable agenda of needed public works to facilitate commerce.

Privately sourced funds are available for new airport projects in the USA, but they are sometimes stymied not by the absence of ‘individual or small number of individuals’ to undertake them without government funding. The main problem is government regulation (local and national) that use zoning laws and permissions preventing projects they disagree with for various reasons, including their other local past investments in an airport elsewhere and ‘cosy’ relationships with other private airlines. (I discussed a case here some months ago in Texas.)

Dr Biswas goes on to discuss US energy deals (Enron) and I am not tempted to follow him because my knowledge of the details is less than adequate. It may be regarded as a purely modern phenomenon pre-dating by a couple of centuries anything Adam Smith could have written about.

Those more competent in US energy in the past few years can follow Dr Biswas at:

http://www.biz-day.com/read/bank_and_finance/15_dec_05/g2c34-9/cautionary_tale_of_role_of_govt_commerce.htm

Smith's Good Sense and Humanity on the Removal of Tariffs

Division of Labour is one of the best of the economics Blogs (visit by clicking it in the list to the left or via: http://www.divisionoflabour.com/) and Robert Lawson one of its regular contributors. Yesterday he wrote:

“For some time, the statist left has been trying to co-opt Adam Smith by saying he wasn't really the supporter of free markets that some claim he was. Granted Smith was no anarcho-capitalist, but to associate Smith's name with the anti-trade, pro-union, left (e.g., Ohio Congressman Sherrod Brown) is truly sickening.”

This, of course, caught my immediate attention because ‘Lost Legacy’ is about protecting Adam Smith’s Works from distortions from whatever source (‘Right’ or ‘Left’, or just plain ignorant) in a bid to restore his true legacy to what he intended it to be. I followed the reference to Sherrod Brown and will comment upon it.

Sherrod Brown writes “Adam Smith’s Soft Side” in “The Globalist - dedicated to global understanding” - on 14 December, and it open with (read it in full at: http://www.theglobalist.com/storyid.aspx?StoryId=4677)”

“In the global trade debate, Adam Smith is usually heralded as perhaps history’s greatest proponent of capitalism. Against that backdrop, U.S. Congressman Sherrod Brown, author of "Myths of Free Trade," has a surprising finding. He argues that, contrary to the teachings of Smith's 20th- and 21st-century apostles, the Scottish philosopher more often than not sided with workers.”

This reverses the usual accolade from extreme ‘laissez faire’ capitalism of Adam Smith being a ‘patron saint’ of selfish unrestrained behaviours (sometimes called ‘Libertarianism’ and Ayn Rand individualism). Whilst it is useful to swing the pendulum in the other direction on occasion we should also be careful not to make errors of a different kind.

This is especially true when quotations are selected to purvey a specific view, torn out of their context. Jacob Viner’s world weary sarcasm bites when he opines that ‘an economist must have peculiar theories indeed who cannot quote from [Wealth of Nations] to support his special purposes’ (Adam Smith and Laissez-Faire’ 1928, page 126).

Smith was a moral philosopher and as such his role was ‘to do nothing, and observe everything’. Reading his prose it is easy to misread by imparting an emphasis he did not intend that he was ‘taking sides’ when he was not. He observed that workmen sometimes tried to form combinations to protect or enhance their interests and that employers resisted such attempts. Smith was intimate with a number of employers and at their dining tables, in their ‘social hours,’ they expressed candid views as well as revealing their collective response to labourers ‘clamouring’ for higher wages or against wage cuts.

His observations that public combinations of labourers were illegal, and harshly treated by local magistrates’, in contrast to the ‘secret’ conspiracies to form combinations among employers, expresses sympathy for the plight of the labourers and implicit opposition to the secret combined activities of the employers, but it remains an observation from a decent person, a moral philosopher, and not a call to action. That was not Smith’s way. The Philosopher observes and reports; society heeds or ignores; other philosophers in due course will comment on the consequences of what happened, or didn’t.

Sherrod Brown makes numerous short points in the extract of which a look at their context would make sufficient comment to ‘touch the tiller’ back towards the centre. One theme is worth tackling because it incorporates some of the errors of the people he criticises. I refer to:

“[Smith] believed that his invisible hand could do great harm to a nation and its citizens “unless government takes great pains to prevent it.”

and:

“Regulation of the invisible hand and direction from the government — especially in the areas of commercial navigation, national security and military preparedness — were of paramount importance.”

These assertions about the invisible hand do not appear in “Wealth of nations”; they are extrapolations from conventional teaching in some US campuses about the role of the invisible hand – a lonely metaphor used once by Smith in “Wealth of Nations” – which was not a theory of markets or anything directly to do with markets, but a metaphorical comment on the outcome of human motivations in favour of watching over their capital stock rather than risking it in ventures abroad or in the ‘carrying trade’.

Hence, it is a mystery as to what Brown means by something that does not exist could ‘do great harm’, and what ‘harm’ it does not do could be prevented by government. What, presumably, Brown is referring to is a policy of laissez faire could do great harm (monopoly pricing), with which Smith would agree, which is why Smith never advocated laissez faire, and nor did he identify a role for an invisible hand. Smith, likewise, would find it incomprehensible for there to be ‘regulation of the invisible hand’. It certainly had no role in Smithian markets! These were fully understood by Smith and were not regarded as in any way mysterious, miraculous or inhabited by invisible hands.

Sherrod Brown writes, under his sub-heading: “The merits of tariffs”:

“He believed that tariffs serve a useful purpose. He expressed caution when a nation contemplates lowering tariffs, for an immediate and precipitous reduction could throw large numbers of people out of work.

And he expressed little caution about temporary retaliatory tariffs when one nation had erected major barriers against another to harm that nation.”

A finer misstatement of Smith on tariffs could hardly be made, giving an misleading impression of Smith’s views on tariffs. In a regime of tariffs (the taxation of imports) of course tariffs have a role – to collect the taxes. He preferred no tariffs to tariffs as a general principle, but he understood their role and the consequences their existence had for policies to remove them. Smith was not writing a mere textbook on economics. “Wealth of Nations” was a report (I have called it a one-man Royal Commission) on what he observed associated with the question of what was the nature and causes of the creation of wealth in the form of what we call GDP, and not mere money or bullion.

Tariffs kept out of the domestic market lower priced, perhaps better quality, goods for consumption. This diverted expenditures from accessing lower priced goods and, therefore, encouraged more expensively produced domestic goods which lowered the distribution of capital stock to more domestically productive industries. In sum, the net growth in domestic product was lower than it needed to be, which inhibited rising real incomes, employment and net annual revenue.

Smith’s policy conclusion was to remove tariffs. However, he was not alluding to blackboard exercises in static diagrams, nor assuming instant velocities of change from tariffs to no tariffs. Smith was a moral philosopher not an abstract mathematical economist, nor a fanatical ‘man of system’. He was aware at all times of the disruptive consequences of sudden changes. His actual reference to his expression of caution was:

“Humanity may in this case require that freedom of trade should be restored only by slow gradations, with a great deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured in so fast into the home market, as to deprive all at once many thousands of our own people of their ordinary employment and means of subsistence. The disorder that this would occasion might no doubt be very considerable” (Wealth of Nations, IV.ii.40, pages 468-9).

That is quite different in its implications (explicitly stated!) than Brown’s claim of Smith seeing ‘merits in tariffs’! Key words used by Smith, showing his character, are ‘Humanity’, ‘slow gradations’ and ‘our people’ (not anonymous factors of production). Smith was for a decent society in which those who changed arrangements took account of the immediate consequences of precipitate actions. He was not blind to the ‘skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs’ (Ibid. Page 468). [In this context I should remind you that Sherrod Brown is a US Congressman from Ohio.]

Those who impose tariffs instantly do so with predictable consequences from those losing their jobs and ‘subsistence’, which in the mid-18th century meant instant destitution; Smith was aware that the same consequences would appear for those affected from their instant removal. To cast doubt on his longer-term intentions for their gradual removal is, well, er, political rhetoric of a dubious kind.

One last point. Sherwood Brown introduces some of the ideas of Frederick List, a 19th century German national economist, and it should be noted, a fairly robust critic of Smith and “Wealth of Nations” in his book: “The National System of Political Economy" (1841). He was at the front-end of the growing German nationalism of that period that bore its nasty fruit in the 20th century. He saw Smith as a crafty ‘English’ (sic) nationalist – he meant ‘British’, but did not recognise the difference), whose ‘Wealth of Nations’ sang the praises of free trade whilst surreptitiously serving the selfish national interest of England at the expense of those nations that were conned foolishly by it, such as Portugal and certain independent German states.

List and Smith are at opposite ends of the spectrum on free trade. First Brown traduces Smith’s real views on free trade – firm in principle, adaptable in the transition for reason of humanity – and then brings in List to carry on Smith’s alleged views into ‘national capitalism’, the ante-chamber for autarky and ‘national socialism’. At least we can see where Brown’s interpretations are leading.

A Chancellor Speculates about Ideas

The Hugo Young memorial lecture was given by Gordon Brown, UK Chancellor of the Exchequer, on liberty and the role of the state, at Chatham House, 13 December.

"All for ourselves and nothing for other people" is "a vile maxim," wrote Adam Smith. Coming from Kirkcaldy as Adam Smith did, I have come to understand that his 'Wealth of Nations' was underpinned by his 'Theory of Moral Sentiments', his invisible hand dependent upon the existence of a helping hand."

Comment
In referring to the ‘vile maxim’ Smith associated this ‘vile’ behaviour with the ‘rulers of mankind’ and from the perspective of mid-18th-century Britain the history of rulers of making was not very encouraging for more optimistic assessments of their behaviours. Classical Rome and Greece provided enough examples of the ‘vile maxim’ in practice, as did the history of medieval Scotland and the rulers of absolutist Europe.

Gordon continues:

“Of course Smith wanted people freed from the shackles of obedience to Kings and vested interests, hence the 'Wealth of Nations' but while he wanted people freed from the old constraints he certainly envisage people free of civic bonds and civic duties, hence his theory of moral sentiments.

Whenever we feel the fate of others is our personal responsibility we are less likely to stand idly by," he wrote. For Smith the moral system encompassed the economic system, generating the responsible virtues of industry honesty, and reliability - and the stable associations in which we accept our responsibilities each to one another, habits of cooperation and trust, the moral sense upon which the market depended.

So he always believed that the centre of a town is far more than a marketplace. And it is true to say that, even when enlightenment philosophers - like Smith - stood under the banner of freedom, they did not argue that their view of freedom gave men immunity from their responsibilities to serve their society: the British way always more than self interested individualism, at the core of British history the very ideas of 'active citizen', 'good neighbour', civic pride and the public realm.

So there is indeed a golden thread which runs through British history of the individual, standing firm against tyranny and then of the individual participating in his society. It is a thread that runs from that long ago day in Runnymede in 1215 and on to the Bill of Rights in 1689 to, not just one, but four great reform acts within less than a hundred years. And the tensile strength of that golden thread comes from countless strands of common continuing endeavour in our villages, towns and cities, the efforts and achievements of ordinary men and women, united by a strong sense of responsibility, who, long before De Tocqueville found civic associations to be at the heart of America, defined Britain by its proliferation of local clubs, associations societies and endeavours - a Britain where liberty did not descend into licence and where freedom was exercised with responsibility.”

[Some of the above wording seems to have' awkward' construction, I suspect from the Guardian's editing, which is not too good at the best of times.]

Comment:

Gordon Brown builds his case for a social dimension of individual behaviour around ideas of ‘building’ these dimensions consciously through intentional programmes of government (soon to be ‘his’ government?), albeit where appropriate in alliance with the non-governmental agencies of the informal voluntary sector, with its traditional proliferation of voluntary societies, of which Britain has always be strongly endowed (there has always seemed to me to be a voluntary club, charity or campaign lurking somewhere for every imaginable issue that has ever surfaced in Britain).

Given the number of quotations from eminent philosophers, writers and historians included in Brown’s lecture it is difficult to give an assessment of his paper – it certainly is a fitting tribute to Hugo Young – but what it means in practice is not easy to determine. He sets out the principles upon which action might be realised and therefore it is unexceptional and, presumably, uncontroversial, except to followers of Ann Rand’s extreme individualism and proponents of massive state determined provision.

We must await the development of the details, perhaps during the first premiership of Gordon Brown.
Read the article at: http://politics.guardian.co.uk/labour/story/0,,1666546,00.html

From an Idea of Adam Smith's?

Star-Telegraph Staff Writer, O. K. Carter (11 December) contributes an article, ‘Taking a Hard Look at the Economy’ by Market Street, an economics consultancy, for Arlington Council, Forth Worth, Texas, USA, about local economic prospects. Broadly, the consultants applied ‘cluster theory’ to the types of business sectors the town wishes to attract.

Consider this extract:

“Cluster theory, incidentally, holds that economic development in some areas tends to proliferate because of a kind of synergy of interconnected groups within a related industry. Think of this as sort of being like the proliferation of auto dealerships and supporting endeavors along Interstate 20. A proliferation of like businesses attracts a big customer base as well as lots of skilled workers. The close proximity also creates a competitive mechanism in which best practices are learned, new technologies or strategies evolve and from which customers or clients receive a benefit. It's pure Adam Smith stuff made more technical, proof once again that Smith was considerably smarter than your average economist.”

My first reaction was to scan from memory whether Smith ever outlined a crude version of cluster theory and decide that it was implausible that he did (I can well believe that a modern economics graduate would make anything simple ‘more technical’). However, on thinking about it I could see it was a plausible assessment by Staff Writer Carter.

What was a Smithian 18th-century market but a ‘cluster’ creating ‘synergies’ for the sellers who congregated in a single location at set times of the week and for the buyers who visited the location knowing they could search for what they wanted with an economy of effort compared to travelling all round the neighbourhood to individual stalls.

Edinburgh in the 18th century had designated areas for markets in specific items (their names survive today in street names such as Haymarket, Flesh Market Close, Lawn Market, and Grassmarket, with others, such as Horse Market known from old prints showing scenes from their market days. If you wanted to sell a horse, work with horses, or buy one, you knew where and on which specific days to go to achieve your goals.

Bringing suppliers into close proximity brought competition (or the possibility of competition) and congregating large numbers of potential customers also brought competition. Smith appreciated both points, though he was well aware of the practices that edged towards monopolies in the behaviours of traders gathering in the same place for ‘diversion’ and of town councils which organised the managed the markets.

Modern cluster theory is an extension of these early observations of Adam Smith (and, of course, others). At some point – measured by their ‘Location Quotients’ – the congregation of particular businesses adds to their economic strengths in employment, R&D, information flows, emulation of best practices, finer divisions of labour and continued expansion. Where this creates comparative advantages for localities in specific business sectors there are net inward flows of revenue into the locality, adding to local economic growth and development.

Read the aticle from Star-Telegraph.com at: http://www.dfw.com/mld/dfw/news/13383628.htm

Andrew Neil on Hayek's Contribution to Solutions to Today's Problems

In one of those remarkable essays that are published from time to time because they shake the thinking of thinking people, Andrew Neil, the Executive Editor of the group of newspapers owned by the Barclay brothers, that includes the Scotsman, the Daily Telegraph and The Business, authors an innocuously titled essay, “What China can teach the West”.

I approached it with the usual semi-interest reserved for familiar themes that appear and re-appear and do not say much that is new. That China is undergoing a major social, economic, and no doubt in due course, a major political transformation is hardly news any more. If you visit China you see it happening before your eyes. Having visited Shanghai and the Pearl River delta in south China if the sheer size of the development does not create a mouth opening awe I suspect nothing will – think modern Hong Kong, only covering hundred of square miles.

However, the article is not really about China alone, nor is it a dreary repeat of all the other wonder-struck travellers’ tales, rolled out to fill space in busy newspapers and tv schedules. In fact, it is only tangentially about China in reality. It is about Britain and Europe, and about fundamental philosophical differences between alternative futures for the next 50 years.

You know this is something different in the first few paragraphs. They catch your mind and make you sit up, eyes wide with attention. I take the liberty of extracting the opening four paragraphs (and risk a copyright suit, perhaps, but in the spirit of Andrew Neil’s theme I am willing to risk the lawyer’s letter).

“OF all the great insights that Friedrich August von Hayek bequeathed to us in his work, one in particular shines out today. For its truth has never been more evident, its application never more universal. It is that running through the ideological and political divisions of human history are two distinct and different ways of looking at the world. Between them is a deep and irreconcilable divide. One Hayek called constructivist rationalism. The other he called evolutionary rationalism.
Hayek spent a lifetime arguing that constructivist rationalism is economically and philosophically flawed because it assumes that “all social institutions are, or ought to be, the product of deliberate design”. Hayek later famously called this the Fatal Conceit .
Those who follow this route believe they have it within their power to build, organise and mould society so that it conforms to their concept of what is just and efficient. But it leads, he argued, to economic decline, poverty, social regression and, in extremis, famine, starvation and the collapse of civilisation. Historic examples of this mindset, said Hayek, included Sparta, the French Revolution, communism in general and the Soviet Union in particular, fascism, Nazi Germany – indeed all the tyrannies that blighted the 20th century. As Hayek famously put it, it is the Road to Serfdom.
Hayek favoured “evolutionary rationalism”. It understands that there “exists orderly structures which are the product of the actions of many men [and women] but are not the result of human design”. Hayek believed this the right approach because it is compatible with the teachings of economic science and goes with the grain of human nature; for these reasons, he thought, it leads to prosperity, progress and the flourishing of humanity.”

You must read it for yourself in full at:

http://www.thebusinessonline.com/Stories.aspx?What%20China%20can%20teach%20the%20West&StoryID=04007447-420D-41B3-ADC3-338E68C0F5EC&SectionID=F60D3E05-7185-44CB-BB45-97AC94420FD5

My original interest was occasioned by seeing a reference to Adam Smith, assuming that it would be a remark abut the “Wealth Of Nations” applied in Communist China. Here is the actual reference; note how wrong I was:

“Hayek’s work is part of a long and illustrious tradition which includes the great philosophers of the 18th century Scottish Enlightenment – David Hume, Adam Smith and Adam Ferguson. His great achievement was to adapt this tradition to the circumstances of the late 20th century and beyond. An early and influential proponent of the alternative, constructivist view was Rene Descartes, the 17th century French philosopher, who famously claimed to have proved that he existed by virtue of being a sentient being. The problem with the Cartesian view when applied to political organisation and economics, said Hayek, is that it gives the green light to unlimited, hubristic social engineering.”

For those unfamiliar with Hayek’s works this article will introduce you to a modern version of Smithian political economy, or rather, so as not to provoke friends from the numerous Hayek and von Mises’ Blogs on the Internet into frenzies about my misreporting what they are about, an alternative to Smith’s analysis of mid-18th century commercial society (a model well-short of the capitalist based societies that evolved in the 19th-21st centuries).

‘Evolutionary rationalism’ fits in well with Smith’s evolutionary approach to his model of society, as set out in his ‘History of Astronomy’, ‘Origins of Languages’, ‘Theory of Moral Sentiments’ and ‘Wealth of nations’. Hayek and von Mises had an additional two hundred years of change to contemplate and to develop their theories of society. I am approaching half way through von Mises ‘Human Action’ and I read through Hayek’s various volumes some years ago. You can read their current thinkers’ approaches in the Blogs listed in the left-hand column on this page.

To get started read Andrew Neil in The Business now.

His article is the 14th Annual Hayek Lecture delivered to the Institute of Economic Affairs on 28 November

Good Sense on Free Trade

Another brilliant piece by Razeen Salley, London School of Economics, on free trade and development, Business Day, Johannesburg, South Africa: “Fear the New Protectionism” (http://allafrica.com/stories/200512070137.html)

“FREE trade is under threat in the early 21st century. Protectionism lurks everywhere. The US, European Union (EU) and Japan are loath to open their agricultural markets. China-bashing has replaced Japan-bashing in the US and EU. Their governments do their best to keep out cheap Chinese-made garments retailers want to sell and consumers want to buy.”

Comment:

Absolutely right. Lower priced imports than can be produced domestically raises the real wages of workers and release capital for those projects that the country has an advantage in. Smith saw this as a theory of absolute advantage in the last quarter of the 18th century; Ricardo developed it as a theory of comparative advantage in the first quarter of the 19th century.

“So where does free trade stand today? What are its prospects? The core arguments for free trade are as compelling today as they were when the philosopher Adam Smith set them out more than two centuries ago. These I call the free-trade trinity -- prosperity, freedom and security. The economic case for free trade revolves around a specialised international division of labour, unencumbered by artificial restrictions, that allocates resources more efficiently and leads to long-term productivity gains. All-round growth and prosperity are its results.

The moral case for free trade centres on individual freedom. It is individual choice and entrepreneurship that drive international commerce, and the resulting prosperity creates better life-chances for those previously deprived of them. And free trade contributes to a more secure international political environment. By forging commercial bonds among nations, it fosters better understanding among the diverse peoples of the planet.”

Comment:

Spot on again.

“Second, pervasive restrictions on the cross-border movement of labour must be loosened. That also promises huge gains for developed and developing countries. Given its political sensitivity, it can only be achieved gradually and piecemeal. But it should be at the heart of a 21st-century free-trade agenda.”

Comment:

Very Smithian: gradualism, measured steps taken with humanity, not all at once in one giant revolutionary step that creates disorder.

“This throws up two points. First, the modern conventional wisdom has it that free trade abroad can be combined with "big government" at home. This view forgets that free trade is part and parcel of free markets -- part of a constitutional whole that includes limited government and laissez-faire policy at home.

Second, 21st-century free trade should rely less on bureaucratic international trade negotiations and more on the 19th-century method of unilateral liberalisation. This is done by governments acting autonomously, and spreads internationally by emulation. The World Trade Organisation and other international trade agreements can be helpful auxiliaries, but their importance should not be exaggerated.”

Comment:

Ignoring the remark about laissez-faire, by taking it in its minimal meaning, and not as a free for-all for anything goes, because businesses, as well as government agencies and labour organisations, must be watched closely for signs of monopolistic urges, we can appreciate the suggestion of unilateral action, rather than trying to proceed through decision systems enshrined in a 143 nation unanimity where any single country has an almost irresistible incentive to exercise a ‘blackmailing’ veto for its own gain (egged on by NGOs who oppose free trade, markets, smaller governments and capitalism).

Ripping-off Round the Clock

Adam Smith railed against monopoly practices and motivations among ‘merchants and manufacturers’, legislatures that gave private joint stock companies legal cover in Royal Charters and laws that prohibited imports or free trade.

The Daily Cardinal, Maddison, Wisconsin (USA) carries a column on a practice that appears to be a clear breach of Adam Smith’s views on monopoly. Perfectly legal, I am sure, otherwise in the ever litigious US somebody would have taken the companies concerned, ‘Clear Channel’ and ‘Ticketmaster’ to their day in court by now.

Matt Hunziker, 8 December, (The Daily Cardinal) write under the heading, "Clear Channel ruins concerts, lives":

“To summarize the late 18th century, the newly independent United States had a run-in with a British invasion (not to be confused with Beatlemania), there was an awful pun about France losing its heads of state and, of course, Adam Smith published “The Wealth of Nations.” The book’s central focus on an “invisible hand” was ahead of its time for science fiction, but Smith’s ideas about the principles of supply and demand and competition have shaped our modern capitalist economy.According to capitalism, competition should insure good service and prices. When an industry is under the control of a monopoly, however, these principles no longer apply, due to the large companies’ complete market domination and doubled rents.”

A fair summary for a journalist (I resist the temptation to nit-pick when the author’s point is quite apposite and worthy of wide reading).

Hunziker continues:

"Such is the current system governing the live music industry, where the average price for a concert ticket has doubled in the last eight years to around $54 and musicians’ freedoms are deteriorating.While one can hardly blame music venues for having monopolized the live performance market (YOU try getting the Rolling Stones to play in your walk-in closet), music fans everywhere have­—for years now—found a more deserving target for their pathos in the duo of media-giant Clear Channel Communications and Ticketmaster, which, for the uninformed, is a kind of automated service that takes your money in exchange for causing you physical pain.These two companies have played a large role over the last decade in bleeding concert-goers dry through a certain kind of underhanded corporate bastardry known as exclusivity agreements.”

The monopoly (really with two of them, probably a duopoly) comes from the companies having pre-booked on an exclusive basis the most suitable US venues for live music. Any music promoter wishing to book her live bands and top singers must book through the exclusive intermediaries and not direct with the venues. Of course, the venues receive a guaranteed income from their exclusive agreements with the intermediaries, and also, of course, the promoters pay an enhanced price for their booking of the venues, but the promoters pass these increased rental charges onto the concert-going public in higher ticket prices.

The venues, the intermediaries and the promoters gain (or do not lose), but the consumers lose out in the difference between the monopoly-induced ticket prices and what the ticket prices would be if there was competition involved in the chain of transactions. Consumers already pay top prices for top events; monopoly adds another layer of cost to the already top prices.

We can be sure, Adam Smith would not have approved of these arrangements. Neither, Is suspect do the fans.

Read the whole column by Matt Hunziker in the Daily Cardinal at:(http://www.dailycardinal.com/article.php?storyid=1028023