Tuesday, August 15, 2006

Smith was not a 'Classical' economist





Gavin Kennedy

In today’s The Monitor (Kampala, Uganda) Moses Byarunhanga, a Special Presidential Assistant on Political Affairs, takes Beti Olive Kamya to task for criticising the government for ‘allocating little resources to the agriculture sector, which employs about 80 per cent of the country’s population.

Beti Kamya writes: "By allocating a mere 3.7% of the national budget to the biggest sector of the economy the government is steadily denying 80% of Ugandans options of employment, practically conscripting them into peasant farming".

It is not my purpose to engage in a debate between two members of another country’s political system – I confine myself to such debates only in the country I vote in, i.e., Scotland – but I would like to pick up the essence of the debate because Moses Byarunhanga makes reference to theories in economics that bear on the role of agriculture in development and includes a comment about the ‘classical economists’:

There are various economic theories. During the 16th-18th centuries, the mercantilists valued gold and silver as an index of national power. In the second half of the 18th century, the physiocrats believed that wealth originated in agriculture; through trade wealth is distributed from farmers to other groups.

The classical economists; Adam Smith, Thomas Robert Malthus, David Ricardo and John Stuart Mills promoted private property and free markets. They believed that the self-interest of individuals would promote the general well being of society.
Other economic theories included the neo-classical economists led by Alfred Marshal (1870s), Keynesian theory which held that when aggregate demand is low, sales and jobs suffer and when it is high all is well and prosperous. All the above theories have attempted to explain
the role of the state in the economy and what constitutes wealth. I call upon politicians as policy makers, journalists and the elite to study in detail all the above theories.

CommentI would take Adam Smith out of the group of ‘Classical economists’, a collective term by Karl Marx, and not really appropriate – he was engaged in brand differentiation. With each passing generation, Smith’s social-evolutionary historical approach was diluted, and finally ditched by the neo-classical theorists led by Walras and Jevons (who misdirected economics from the 1870s until recently, pace Eric Beinhocker’s book, The Origins of Wealth’, into the abstract mathematical world of general equilibrium, using the ‘wrong’ maths for economics).

Smith’s evolutionary model allowed for quite wide variations in politico-economic processes well short of his ideals of Perfect Liberty. Indeed, the ‘natural’ sequence of agricultural development, then manufacturing, then ‘distant sale’ (within the county and for export) had nowhere in Europe been followed, Smith noted. In Wealth of Nations he explained why: the fall of the Roman empire had led to the destruction of agriculture for export, the desertion of the cities with a collapse in manufacturing, mainly instruments for farming and luxuries, and regimes of warlord barbarism, which evolved into feudalism. When commerce gradually revived from the 14th to the 17th century in Europe, and agriculture had settled into post-feudal forms of land tenancy, knowledge had also moved on and manufacturing received a boosts, some promoted by governments (Elizabethan, for example), and some by world oceanic explorations (shipping technologies and navigation).

Wealth of Nations is a report of Smith’s inquiries into those factors, social, political and historic that inhibited economic growth. In it Smith asserts that if a society has to follow a pure path of ‘perfect liberty’, and the ‘natural’ sequence of agriculture to distant sale of manufactures, then no country in Europe would have succeeded in progressing to opulence. Hence, his critique of what he called ‘mercantile’ political economy with its multitude of interferences in primitive accumulation of capital and the division of labour, within and between the economy’s sectors, and its infrastructure.

Now a modern country, such as Uganda, facing problems of economic growth, is on the right lines if it recognises, as Moses Byarunhanga asserts that it is, that the government’s role is to remove obstacles to development that arise from its particular circumstances and to replace these obstacles with infra-structure that supports development (roads, bridges, irrigation, education and health, which are in the other sectors that support agriculture). These, combined with small private capitals in the hands of people who seek to better their condition, are the way forward. The essential foundation is justice and clean government.

Smith had a lot to say about these policies. I am less sure that the policies and theories enunciated by Malthus, Ricardo, Mill, Walras, Jevons, Marshall, and the neo-classical paradigm, offer much for a country like Uganda. Scotland in the mid-18th century was closer to Uganda today than the economic theories of an industrialised world of the 19th and 20th centuries.


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