Thursday, December 15, 2005

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.

0 Comments:

Post a comment

<< Home