Friday, September 08, 2006

Some Modern Economists and Marxists Err on Adam Smith

Another book review, but this one a muddle of Marxism and socialism. Eugene Coyle reviews Michael Perlman’sRailroading Economics: the creation of free market mythology', Monthly Review Press, 2006.

Eugene Coyle, Ph.D., is an economist with more than 30 years of experience with utility regulation. He is an independent consultant, and his clients include TURN, the American Public Power Association, and the governments of Brazil and Mexico. He has also served as an adviser to Commissioner Carl Wood of the California Public Utilities Commission. His research helped the Korean Electrical Workers Union to successfully block privatization of electric power in Korea. Clearly, he admires Michael Perlman’s book:

“Chapter 1 describes the transition from political economy to just plain economics -- and why. Perelman sets the age of classical political economy as the period from Adam Smith's Wealth of Nations in 1776 to around 1830. Rather than defend the prerogatives of the crown, these economists sided with the rising middle class. "The leading political economists, such as Smith and David Ricardo, called for political changes that would make the economy conform to the norms of the market, what economists called 'laissez faire'." And they contended that the interests of business coincided with those of society as a whole.

Comment
Methinks that Eugene and Michael have relied too much on interpretations of what Adam Smith was about in the attempt to squeeze him into a cardboard role of being a brain-washed servant of the ‘rising middle class’, a typical (you could say, stereotypical) ascription of late Marxian sociology.

The period 1776 to 1830 is far too long to capture Smith and Ricardo in the same net. Anyway, Smith started working on what became his ideas in Wealth of Nations long before it was published in 1776; many of these ideas were written between 1764 and 1776, from his lectures in Edinburgh and Glasgow between 1748 and 1764 and, therefore, were influenced by events long before the neat symmetry of a link to a seminal date in American history. Wealth of Nations was also revised and added to in 1783 (3rd edition, with 24,000 words of new text). To detect the hidden hand, to coin a phrase, of the rising middle class is truly a triumph of invisible forensic skills, akin to the wonders of reading tea leaves.

In fact, Smith did not write a textbook of the principles of political economy, which might be the case with David Ricardo; Smith wrote a report of his specific inquiry into the nature and causes of the wealth of nations. His method was historical and combined his social-evolutionary approach to the political history of Europe from the fall of the Roman Empire (476) to the mid-18th century. He wrote nothing about capitalism (a phenomenon and word of which he knew nothing). That phenomenon happened after he died in 1790. He wrote about the social evolution of humankind from the Age of Hunting, through the Ages of Shepherding and Farming to (‘at last’) the Age of Commerce. And the commerce he wrote about was fairly primitive, as was capital accumulation and the relatively simple markets and the division of labour, both within a specific process (pins) and among sectors (common labourers’ coats).

By mid-18th century, the prerogatives of the Crown, in the form of absolutist monarchs, were over in Britain and were replaced by constitutional monarchy, with governance in parliament, under the ambit of what passed for Liberty. This, allied to Smith’s (from Francis Hutcheson) adhesion to ‘natural rights’, were seen by him as important steps to constitutional liberty, which, with a relatively impotent monarchy, amounted to republicanism.

Smith certainly advocated policy changes (he had no known views on ‘political changes’ – his politics remain a mystery: see Donald Winch, ‘Adam Smith’s Politics’, 1978) - and these amounted to his conclusions about the creation of wealth, not defined as money (gold, silver, baubles, etc.,) and the policies that stood in the way of the gradual, slow and evolving improvement in what we call national income – the annual output of tangible goods, or what he considered to be the same thing, the ability of participants in production to purchase the outputs of production, either of which amounted to a spread of opulence, particularly for the common labours and their families, who were desperately poor, especially in Scotland.

The notion that Smith neglected production is breathtaking in its emptiness; mere words to make Smith fit with the image of the Monthly Review’s commissioning editors of what Smith was about and the need to link him to Ricardo (who wrote in an entirely different genre to Smith).

We are told that:
“Karl Marx, in contrast, "…brilliantly showed how the analysis of classical political economy, built around the analysis of production, could be turned to demonstrate how employers exploited their workers.

The analysis of exchange, rather than the analysis of production was the key to refuting Marx, so the economics profession turned to a theory of markets rather than a study of industry.”

Comment
Well, Smith, of course, had nothing to say about Karl Marx to ‘refute’ him – Smith died in 1790, and cannot be held responsible for what any so-called representative of the ‘rising middle class’ considered to be a refutation of Marx, who was ignorant of the work Smith did before Wealth of Nations (see Marx’s assertions in Capital about Smith being a ‘pupil’ of Adam Ferguson!), as is shown conclusively in Smith’s Lectures on Jurisprudence.

Coyle’s final paragraph is priceless:

23 pages of footnotes support Perelman's arguments. The book leads to a good understanding of why markets fail, and how, knowing that, economists continue to teach the lie that the best of all possible worlds will flow from letting the market decide everything.”

Comment
I regularly assail modern (Chicago) economists for what they teach about Adam Smith, so it is not difficult to see how I would comment on the last sentence. Whatever modern economists teach, or Marxian economists teach about modern economists (a ‘pox on both their houses, I say!), Smith never taught that “the best of all possible worlds will flow from letting the market decide everything”. He detailed the policies that inhibited the speedier, but nevertheless slow and gradual, growth of wealth (as defined above), and accepted that even with these Mercantile policies imposed on the economy, it would continue to grow despite the policies of people, as it had through the millennia. It would take longer, that is all – there is a ‘lot of ruin in a nation’ he cautioned on a panicky young man. He emphatically denied that it was necessary for free trade to be introduced before economies could thrive. He called this view 'utopian'.

Markets are powerful human mechanisms, but they are still staffed by people. Never forget that. Their so-called driving agents, the ‘Merchants and Manufacturers’, did not receive from Smith the same paeans of praise that Marx was to accord to them, for their role in markets. He was deeply suspicious of these people and their tendencies to monopoly and price conspiracies against consumers. Smith was never a believer in laissez-faire, as were some of his French counterparts (he never used the words even).

What he would have said about modern railroads and energy industries we will never know. Neither industry had yet been invented when he retired to his bed for the last time. I sometimes think that modern economists (and Marxists) forget that fact, as they do most else associated with Adam Smith and his lost legacy.

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