Tuesday, January 31, 2006

Billions Spent Maintaining Poverty

Tim Wortsall, in his Blog today, catches onto a powerful story of state-financed failure from Tim Luckhurst, ex-editor of The Scotsman, in today’s Times (London).

It’s about state-financed policies as they operate on the ground in Glasgow, Scotland, and their real affect on children of state-financed dependents. Nowhere is it more evident that spending vast sums of taxpayer’s money in pursuit of ‘social equality’ (also known as ‘palliative’ care for the poorest members of society), can ever be enough to eradicate the real cause of poverty – i.e., the absence of employment in wealth-creating activities, not the absence of money. I risk Tim’s wrath in reprinting his piece in full because not a single word is surplus to the horror of what is reported:

Government Doesn’t Work.

A quite wonderful little Thunderer here from
Tim Luckhurst:What this sordid incident really challenges is the Chancellor’s assertion that “only the State can guarantee fairness”.
In the grim Glasgow housing estate where the 11-year-old hails from, and estates like it in Aberdeen, Edinburgh and Dundee, the State is ubiquitous. It houses, feeds, clothes and educates. In many households it is the sole breadwinner. The minority of adults who do work are likely to be employed by it;the State employs a higher proportion of Scots than in any other democracy. It recruited 9,000 new employees last year alone, bringing the total number of Scottish state employees to 577,300. And what do vast swaths of them do? They pursue social inclusion, often as drug outreach workers, on these grim housing estates.
If Mr Brown were right, Scotland would be nirvana and its peripheral housing estates idyllic. Here state provision of services to eradicate squalor is lavish. Spending on the NHS, schools, benefits and social care exceeds any elsewhere in Britain. Yet, after three decades of Labour dominance and seven years of the Labour-dominated Scottish Parliament the welfare state is failing utterly.

What has Labour ever done for Scotland? Apart from low life expectancy and economic stagnation, an honest answer must include 11-year-old heroin addicts, the highest rate of adolescent alcoholism in Europe and a level of teenage pregnancy to match.
Brings to mind PJ O’Rouke’s astonishing point. You can’t cure poverty by giving people money.”

Read Tim Luckhurst’s original piece via: http://www.timesonline.co.uk/article/0,,3284-2017098,00.html and read Tim Worsthall – everyday! –
at: http:// timworsthall.typepad.com/timworsthall


For those of us who live in Scotland, the grimy stories that occasionally emerge from the sink public housing estates of its main cities, including beautiful Edinburgh, are constant reminders of the prices paid by the so-called beneficiaries of state spending, combined with the inevitable state neglect. The cycle of squalid poverty, unrelieved by spending vast budgets according to the preferences of the middle-class educated elites, continues unabated generation after generation. If poverty could be eliminated by money, it would have been eradicated years ago. Participation in wealth creation abolishes poverty and wealth is created in societies that expand opportunities for all, a point noted by Adam Smith in his strictures against stagnating and declining economies.
As long as politicians retain power from dominating deprived constituencies of voters trapped in the hopelessness of their poverty and unemployment, lousy schools, poor heath and squalid housing, they will not do anything serious about ‘making poverty history’. They spend billions on these afflictions each year with little to show for it.

Tim Worsthall and Tim Lunchurst talk more sense than all the politicians who tout their ‘social consciences’ and impose their losing prejudices on their hapless victims together. It need not be like this in the country of the Enlightenment.

Machiavelli and Adam Smith?

Robert Higgs, senior fellow in political economy at the Independent Institute, contrasts Machiavelli’s advice to a wise prince on how to ensure the prosperity of all citizens of a republic, with Adam Smith on the roots of prosperity lies in countries under the rule of law, natural liberty and justice, and the sanctity of private property (“The Economic Policy of Machiavelli's Prince”, January 30, 2006).

The prince, wrote Machiavelli:

ought accordingly to encourage his subjects by enabling them to pursue their callings, whether mercantile, agricultural, or any other, in security, so that this man shall not be deterred from beautifying his possessions from the apprehension that they may be taken from him, or that other refrain from opening a trade through fear of taxes; and he should provide rewards for those who desire so to employ themselves, and for all who are disposed in any way to add to the greatness of his City or State” (The Prince, New York: Dover, 1992, p. 61).

Smith, who often referred to Machiavelli and had copies of his books in his library, put it similarly in “Wealth of Nations”, New York: Modern Library, 1937 [1776], p. 862 in the Edwin Cannan edition; apologies, I am still in France and cannot access references from my Glasgow (Liberty Fund) edition:

Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.”

Machiavelli placed prosperity along a continuum from countries where the people are oppressed, to where they are free from oppression, of which punitive taxation is a prime symptom:

"[h]e who becomes a Prince through the favour of the people should always keep on good terms with them; which it is easy for him to do, since all they ask is not to be oppressed" (The Prince ,New York: Dover, 1992, p. 25).

To which Robert Higgs comments: “Fortunately for the ruler, the masses do not make great or complicated demands”. Machiavelli added:

A Prince . . . sooner becomes hated by being rapacious and by interfering with the property and with the women of his subjects, than in any other way. From these, therefore, he should abstain. For so long as neither their property nor their honour is touched, the mass of mankind live contentedly, and the Prince has only to cope with the ambition of a few, which can in many ways and easily be kept within bounds” (The Prince,New York: Dover, 1992, p. 47).

These insights from Machiavelli and, later, Smith, should be pertinent in recent discussions on the role of ‘democracy’ in combating terrorism in which it is sometimes forgotten that there is much more than democratic elections needed to combat destructive politics. Democracy has to have its roots deep into liberty, the rule of law, private property and justice.
Simply having elections is never enough.

Communist countries held ‘elections’, as did the Weimar Republic in pre-Nazi Germany and Saddam’s Iraq, but absent liberty, law and personal security from the oppression of the instruments of the state, a ruthless political party can cover itself in a veneer of ‘electoral democracy’, and create all kinds of violent mayhem against its citizens and neighbours.

Robert Higgs is the author of
Resurgence of the Warfare State, Against Leviathan and Crisis and Leviathan, and editor of the scholarly quarterly journal, The Independent Review.

(Read his article at : http://indepdendent.org)

Monday, January 30, 2006

The Left hand not knowing what the right hand does?

Last week Murray Rothbard, a leading Austrian economist a few years back, was quoted in the von Mises Institute Blog fully endorsing Joseph Schumpeter’s robustly critical views in his History of Economic Analysis on Adam Smith (See my pieces on “Murray Rothbard’s Myths”, 1- 6).

This week another Austrian Economist, Henry Hazlitt from the same school, is also quoted in the von Mises Institute Blog, less than politely attacking the same Joseph Schumpeter’s views in the same book, in his History of Economic Analysis, this time on Frédéric Bastiat. From praise to severe criticism in the space of a week. What is going on? Does the left hand not know what the right hand is doing?

Here is what Henry Hazlitt says about Joseph Schumpeter’s assessment of Bastiat:
It has even become a fashion for some economists to write about Bastiat patronizingly or derisively. This fashion reaches a high point in an almost contemptuous one-page notice of Bastiat in the late Joseph A. Schumpeter's History of Economic Analysis. "It is simply the case," writes the latter, "of the bather who enjoys himself in the shallows and then goes beyond his depth and drowns…. I do not hold that Bastiat was a bad theorist. I hold that he was no theorist."

“Schumpeter's judgment of Bastiat is not only ungenerous but unintelligent, and for the same reason that it is unintelligent to deride an apple tree for not bearing bananas. Bastiat was not primarily an original economic theorist. What he was, beyond all other men, was an economic pamphleteer, the greatest exposer of economic fallacies, the most powerful champion of free trade on the European Continent. Even Schumpeter (almost in a slip of the pen) concedes that if Bastiat had not written the Economic Harmonies, "his name might have gone down to posterity as the most brilliant economic journalist who ever lived."

What the "might have" is doing here I do not know. It has so gone down.”
The only common thread between these views of this two luminaries of the von Mises Institute appears to be that both were published to promote two new sets of books from the von Mises Institute, one by Murray Rothbard and the other by Frederic Bastiat.

Of course, that Schumpeter is wrong in his interpretation of Adam Smith because he is wrong on Bastiat, would not be a logical conclusion (or vice versa), but as I have shown, Rothbard’s reading of Smith’s “Wealth of Nations” in the misinterpretations of what Smith actually wrote (I cannot believe a person of his intellectual stature actually read the passages he criticises, given his elementary errors about them) suggests to me that Schumpeter is a weak source of authoritative opinions on either Smith or Bastiat, and that Rothbard is also unreliable.

Sunday, January 29, 2006

Not a Nation of Shopkeepers

Adam Smith is often credited with ‘sayings’ or ‘bon mots’ made out of something he is thought to have said, but didn’t, or at least didn’t in the form or meaning attributed to him. Harmless fun perhaps, but repeated three or four times and original allusion to his authority for passing on a less than correct rendition of his actual words if forgotten, and the error becomes scriptural.

Take an amusing New Year piece by Professor George Gregoriou, William Paterson University, New Jersey, USA, in GreekNews for 9th January (I have only just received notice of it):

OK, we are just a nation (or a world) of shoppers. Our civilization has done this to its credit: produced consumer goods for every pocketbook, which is the message with every holiday, religious or secular. Shop till you drop. We are, as Adam Smith (1776) said of the British, a nation of shopkeepers. America and the world responded to this call, with vengeance.”

That is not quite what Adam Smith said at the time, when average incomes were well below what today we would consider to be absolute poverty on a frightening scale, even compared to the relative poverty ‘suffered’ by too many today in what we describe distastefully as slums.

The reference to a ‘nation of shopkeepers’ is found in Book IV.vii of “Wealth of Nations” (apologies for the vague reference; as explained earlier I am in France and separated from my Glasgow Edition of Smith – the copy I am using here is J. R. McCulloch’s 1863 edition, p. 276). Smith discusses ‘Colonial Policy’ and contrasts the expense of defending colonies (in particular the American colonies) with the actual revenue generated for the mother country. In short, he finds contrasting their costs with benefits shows them to be of negative worth, and the arguments for fighting for them spurious.

To found a great empire for the sole purpose of raising up a people of customers, may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow citizens to found and maintain such an empire.”

I believe it was Napoleon, not Smith, who described Britain as a ‘nation of shopkeepers’.
In case there is a misunderstanding of Smith’s views about shopkeepers, I suggest you read his praise of their essential role in wholesale and retail distribution. describing them as ‘productive labour, an interesting statement in view of common misunderstandings about his distinction between ‘productive’ (growth enhancing) and ‘unproductive’ (growth inhibiting) labour. See “Wealth of Nations”, Book II.v, page 160.

Candidate for the January Lost legacy Prize?

KEITH OATLEY (Globemail.com, Canada)Saturday, January 28, reviews “Roots of Empathy: Changing the World Child by Child” By Mary Gordon (Thomas Allen).

Keith Oatley writes:

Of all our human characteristics, empathy is among the most important. Adam Smith thought that the set of emotional traits that includes empathy, sympathy and compassion was the glue that holds society together. He called these traits "moral sentiments."

This is excellent use of ideas from Smith’s “Moral Sentiments” (1759), a books being rediscovered by a wide range of academics. Smith’s “Theory of Moral Sentiments” available at a sensible price from Liberty Fund, Indianana, USA (try Amazon.com)

I have a slight worry about the metaphor of 'glue' holding society together - only because of what has happened to Smith's use of Shakespeare's metaphor of the invisible hand!

Keith Oatley is director of the Cognitive Science Program at the University of Toronto. Last year, he published Emotions: A Brief History, and this year a second edition of his standard textbook, Understanding Emotions, came out, co-authored with Dacher Keltner and Jennifer Jenkins.

Friday, January 27, 2006

Myths of Murray Rothbard no 6

Murray Rothbard writes his polemic against Adam Smith entirely based on his own reputation as an Austrian economist, making charge after charge against his target without giving the kind of detailed evidence in support of his case that one expects from a younger economist yet to make his or her reputation among professionals peers.

Rothbard apparently expected his Austrian colleagues and sympathisers (and others, such as myself, who admire their work without necessarily subscribing sufficiently to be an affiliate) to accept his, albeit intemperate, judgements uncritically. However, should his readers be familiar with Adam Smith’s life and work, they might recoil from his more extreme criticism, perhaps, as I do, by assessing Rothbard’s detailed points (on the few occasions where he gives any), which are clearly incorrect exegetically (as itemised in previous my postings 1-5) as bald generalisations more suitable for opinionated journalists than for reputable scholars.
In this respect, consider Rothbard’s criticism of Adam Smith on what became known after his death in 1790 as the ‘Industrial Revolution’.

Smith's use of an example of a small French pin-factory rather than a larger British one highlights a curious fact about his celebrated Wealth of Nations: the renowned economist seems to have had no inkling of the Industrial Revolution going on all about him. Although he was a friend of Dr John Roebuck, the owner of the Carron iron works, whose opening in 1760 marked the beginning of the Industrial Revolution in Scotland, Smith showed no indication that he knew of its existence. Although he was at least an acquaintance of the great inventor James Watt, Smith displayed no knowledge whatever of some of Watt's leading inventions. He made no mention in his famous book of the canal boom which had begun in the early 1760s, of the very existence of the burgeoning cotton textile industry, or of pottery or of the new methods of making beer. There is no reference to the enormous drop in travel costs that the new turnpikes were bringing about.
In contrast, then, to those historians who praise Smith for his empirical grasp of contemporary economic and industrial affairs, Adam Smith was oblivious to the important economic events around him

Rothbard, as pointed out earlier, misreads Smith’s paragraphs in “Wealth of Nations” on the pin factory to arrive at the conclusion that Smith only considered an ‘18’ operations to make pins example from the French Encyclopaedia (1775) and not the ‘larger British one’ which had (Rothbard alleges, without citing a reference) ‘25’ operations in ‘England’. Smith certainly quoted the 18 operations example from France, but left the ‘10 labourers’ example, which he affirmed that he witnessed (presumably in Scotland), where some of the ten operators undertook more than one operation each. Smith did not refer to the total number of operations at the factory he visited. There could be 18 operations, or any number greater than 18 up to and beyond 25. This is a telling detailed example of Rothbard’s habit of generalising in his rush to make a secondary point about Smith’s alleged plagiarism. Rothbard, for all we know, may have got the numbers mixed up from his secondary sources. What else did he mix up?

Was Rothbard aware of the conditions in which Smith wrote the bulk of “Wealth of Nations”, and certainly its first chapters? He was not writing in a well-endowed University library – he left Glasgow in January 1764. He wrote on the basis of whatever books he had acquired privately; he did not have a tenth of the books available to Rothbard in the last quarter of the 19th century, plus the 200 years or more of additional academic research published widely in journal articles. He had the examples of the division of labour from Plato and, perhaps, Petty, and others, including his student’s notes of Francis Hutcheson, the extract from the French Encyclopaedia and his notes from a visit to a small pin factory.

Rothbard sneers: “the renowned economist seems to have had no inkling of the Industrial Revolution going on all about him.” For a start, perhaps Rothbard elaborated on the details of the “the Industrial Revolution going on all about him” and gave details of whom among Smith’s contemporaries had an ‘inkling’ of the Industrial Revolution in the third quarter of the 18th century?

That Smith knew Dr John Roebuck and James Watt is beyond doubt. That he should have grasped the significance of the Carron Ironworks for the industrial revolution development is extravagant. What features of Roebuck’s investment were progenitors of the power-driven industry of the 19th century that became known as the Industrial Revolution? It was certainly large scale, but it was not power driven. T. S. Ashton (The Industrial revolution, 1760-1830, Oxford 1948) declared that the lighting of the furnace at Carron on 26 December 1760 was the day when the industrial revolution began, but this is from his well-documented hindsight not his foresight and the same hindsight is found in abundance among scholars, not in 1760, but after 1860 when the contours of industrial development taken together were visible to all who shared their research-fed literary privileged vantage points, including, of course, Murray Rothbard writing in the 1960s.

James Watt was Glasgow University’s instrument maker and part-time dabbler in mechanics. Smith taught yards away from Watt’s workshop but little untoward in terms of Watt’s future role in the power-driven industrial revolution was visible to Smith between 1751-1763. The early years of Watt’s experiments with steam power were related to the pumping of water out of coal mines (an ancient trade) and not the driving of factory-based machinery in the next century.

There has been a long-standing debate among economic historians about Smith’s awareness of the isolated, separate and dispersed changes slowly beginning to appear in the last quarter of the 18th century. I discuss this in more detail in ‘Adam Smith’s Lost legacy’ (Chapter 29: Palgrave Macmillan, 2005). I conclude broadly in favour of Charles Kindleberger’s assessment that he was not aware, nor had reason to be so, and that R. M. Hartwell’s assessment that he was aware is wrong in detail and in his assertions about the evidence.

As for Rothbard’s straws about ‘canals’, Smith discussed their suitability for public investment; of ‘turnpike roads’ he discussed their suitability for public or private management in Book V, though there was a long way to go before they would reap economies of scale (it still took two days to travel from Glasgow to Edinburgh, a distance of 40 miles, in the 1760s) and the state of most of Britain’s roads remained chronic well into the 1840s. Smith recognised their importance for commercial prosperity and he discussed the advantages of better roads for commercial transport by six-horse pulled wagons.

As with other details in Rothbard’s polemic, while there is room for debate about the conclusions we can draw from such details, and opinions may differ legitimately, I come back to my main charge that Rothbard on Smith is unfair where he is wrong and dubious when he says something with which reasonable people might be open minded. Rothbard and his sympathisers have no grounds for his expressed absolute certainties.

Thursday, January 26, 2006

Murray Rothbard’s Myths (Part 5)

Murray Rothbard pounces of Adam Smith at the end of his article on the subject of the differences between ‘productive’ and ‘unproductive labour’ and completely misses the point, as have so many, including Karl Marx (now that is a strange combination – Rothbard sharing something in common with Karl Marx!).

Many people confuse ‘unproductive’ in Smith’s sense with ‘useless’ or ‘unimportant’ labour, when Smith’s distinction had nothing to do with the merits or utility of labour. That the Physiocrats had a similar nomenclature for labour depending on their ‘produit net’ is also not relevant. Smith used the distinction in a different sense.

Remember, Smith’s book was a report on his ‘Inquiry into the Nature and Causes of the Wealth of Nations’. It was not a general textbook on political economy. It was a report on the application of political economy, as it existed in the mid-18th century, plus whatever elements he added from his perspective of moral sentiments, jurisprudence, and history, to his evolutionary model of man in society. Its focus was on the wealth (the annual goods produced in a country) of nations, primarily Britain, and how each country grew its capacity to produce those goods, the real wealth of a nation and not the amount of gold, silver or paper money its citizens or its prince hoarded.

The idea of a country’s net product of goods being its growth one year with another was not Smith’s alone and he never claimed it was. It was not the same as the produit net of the French Physiocrats, who confined their meaning to products of agriculture from the fact that an amount of seed when planted resulted in a greater amount of seeds or food when grown to maturity. That this produit net was visible, obvious and beyond dispute (outside droughts) was too plain to be contested. An amount of raw material did not visibly produce a produit net in the same manner – seeds bore fruit – because the physical product of raw material was not visible in a larger amount of something tangible. The notion that labour added to raw material produced a value not a larger output required a different perspective, and if I may suggest, a higher level of conceptual insight, which some French economistes approached, but the majority of Physiocrats did not.

Tracing exegetically the origins of this higher level of conceptual insight, that is now commonplace, is not my purpose here. I shall confine my remarks to the distinction as understood by Adam Smith (but not, apparently, by Murray Rothbard).

Smith regarded labour that contributed to growth of the net product of wealth as productive. That was what he was interested in his report into the growth of wealth. It followed that labour that did not contribute to growth, inclusive of the labour that replaced itself in the same amount of wealth each year, was unproductive labour. That this is narrower definition than is common place nowadays, with the inclusion of labour producing intangible services sold in markets, is accepted.

Our understanding of productive labour has matured as the economy matured from Smith’s fairly simple commercial society of farmers, journeymen, tradesmen, merchants and manufacturers, producing food, clothing, shelter, household goods, implements and trinkets typical of 18th-century living standards and implements of the 18th century carrying trade and its wars. The mass consumer and service society of late capitalism and big government was far ahead of the conceptual horizons of Smith, his contemporaries and successors. Rothbard’s penetrating hindsight is a wonder to behold, but hardly relevant when judging what Smith should have known, anticipated or been aware of (e.g., the ‘industrial revolution’), but, like all his contemporaries, did not.

Smith was interested in what caused growth. His identification of productive labour as the cause growth, and unproductive labour as not causing growth, is a simplification that was not in error for its time. He saw the motivational causes of labour leading to growth as a result of the frugality of those (journeyman manufacturers working in small forges, blacksmith’s shops, saddlers yards and weaving sheds attached to the labourers’ houses, and such like) whose savings from their revenues (incomes from productive activities) were devoted to hiring productive labour to create tangible product sold in markets.

In contrast what he called ‘prodigals’ spent from their revenues to hire domestic hands who did not produce output that was sold to its recipients at a price covering any added value. Their output was consumed by the persons hiring their services in the form of domestic labour that produced a degree of comfort satisfying the hirers’ urge to indolence. That is all he meant by their labour being unproductive. It was a distinction with a difference within the terms that suited Smith’s purpose to inquire into the nature and causes of the wealth of nations.

Rothbard concludes from his misunderstanding:

Clearly, Smith wanted far more investment towards future production and less present consumption than the market was willing to choose. One of the contradictions of this position, of course, is that accumulating more capital goods at the expense of present consumption will eventually result in a higher standard of living unless Smith prepared to counsel a perpetual and accelerated shift toward more and more never-to-be-consumed means of production.”

Again Rothbard misunderstands Smith’s approach. He did not write a manifesto; he did not advocate that everybody should cease to being prodigal and convert to being frugal, and certainly not that the state should enforce such a ludicrous proposition. He described what many people did and what a few did differently, and what the consequences were from their behaviours in terms of the effect of their actions on the growth in a nation’s wealth. What people did next, as a result of understanding the differences in the distinct behaviours, he left an open question for future behaviour to cope with the consequences. He certainly cautioned against ‘men of system’ and their fanaticism tolerating no exceptions (a mood or manner of behaviour, if I may say so, that would incorporate much of the writing style of Murray Rothbard based on the extract from his book).

Smith noted that the frugality of a few income earners in contemporary 18th- century Britain was sufficient to bring about a gradual, persistent and steady rate of economic growth in real output (and real wages for common labourers), sufficiently encouraging for him to believe it could offset the ‘wasteful’ expenditures (in terms of growth not civilised comforts) on the ‘dignity of the sovereign’ and the wars of governments. He did not advocate a kind of ‘Stalinist’ dash for growth in ‘heavy industry’ at the expense of consumption.

He was happy to leave to individuals the decision to spend all, or to save some, of their revenues; implicitly, he suggested the more that individuals chose to save out of their urge for frugality the relatively faster the nation’s growth rate would be, a true proposition not a falsehood. Contrary to Rothbard’s it’s either investment or consumption nightmare (not a choice in the 18th century), Smith considered that there was sufficient of each available type of labour to produce the desired outcome as a trend over time that would enrich the wealth of the nation.

To this extent, I believe Murray Rothbard’s critique of his version of Adam Smith’s myths is more a demonstration of Murray Rothbard’s Myths about Adam Smith.

Sunday, January 22, 2006

A Lawyer on Reputation and Smith's "Moral Sentiments"

Bruce McEwen is a US lawyer with degrees in economics and law who hosts a rather remarkable Blog entitled ‘Adam Smith, Esq., (‘an inquiry into the economics of law firms’), a site I visit at least weekly, and good value it is too (www.bmacewen.com/blog/). Last week (18 January) it carried a most interesting piece: ‘Your Money or Your Reputation: Adam Smith, the first behavioral economist’.

Using an article (“Adam Smith, Behavioral Economist?”) by Anne Cullen (‘a business information librarian at Baker Library, Harvard Business School, with a specialty in finance) as the ‘hook’ into his main theme (see “Harvard Business School: Working Knowledge (‘for business leader’)” 16 January, he presents a comprehensive message from Adam Smith’s “Moral Sentiments” (1759) warning his fellow lawyers to avoid compromising their reputations with dubious conduct in pursuit of personal riches.

Anne Cullen, while getting Smith wrong on the invisible hand, states that “Adam Smith's The Wealth of Nations, first published in 1776, helped create the discipline of economics with its conjuring of the invisible hand, self-interest, and other explanations of market forces that have influenced academics, governments, and business leaders ever since”, and goes on to draw attention correctly to his “insights from one of Smith's earlier works, The Theory of Moral Sentiments” which “contribute[s] to modern thinking on everything from our fascination with celebrity to the theory of loss aversion.”

For that alone we can excuse Anne Cullen’s errors (or rather, the errors of the sources from whom she adopted this message) on the invisible hand (a lonely metaphor from Shakespeare’s Macbeth, 3:2) because she makes public in a widely circulating journal an excellent account of the some of the ideas from “Moral Sentiments”.

Bruce McEwen summarises the case well:

But it’s when we come to Smith’s bedrock belief … in the importance pf trust. Concern for fairness, and reciprocity, that the linkage of human psychology to market functioning becomes clear. Smith believed that those value become more, not less, important as markets evolve. For example, with many of the professions, most assuredly including our own [lawyers], clients cannot monitor quality in real time – and the same goes for doctors, auditors, and financial advisors. So trust and reputation stand in where cold economic calculus fails.”

Read it for yourself. It’s well worth the effort should you wish to understand more about Adam Smith’s life's work.

Patience Please!

I am about to travel to France to make arrangements for my daughter's wedding and this may take a few days, though I hope to be connected to the Internet to publish some materials I have been writing since Thursday on Murray Rothbard's 'Myths about Adam Smith' (which have been interrupted by three days , Friday to Sunday, teaching at Heriot-Watt University for my, now annual, lectures/workshop for MBA students).

Please exhibit the legendary patience of 'Lost Legacy' readers while I am lax in blogging for these next few days.

I see that the von Mises Blog has produced another blast at Adam Smith from the re-issue of Murray Rothbard's volume on the history of economic thought. I can only comment on an aspect of its quality from what he alleged were the views of Adam Smith, and I have to say I am not impressed. I discussed Rothbard's work with a venerable and distinguished, academic colleague the other day and he reported that Rothbard was a 'convert' to Austrian economics who, like many converts to anything, from stopping smoking to changing religions, became somewhat fanatical in his language when discussing anything. This detracted, he said, from the merits of Rothbard's scholarly work.

I cannot comment on the veracity of his statements, other than I respect them from knowing of his own scholarly qualities and believe there must be some substance in them, given the elementary errors in what Rothbard attributes to Smith's views and contributions. commented upon in my parts 1-4 posted here.

So far I have commented on his (mis)representations of Adam Smith as a plagiarist and I have not addressed, so far, the serious charges of plagiarism Rothbard made against Smith.

I did address Smith's 1755 'paper' quoted by Dugald Stewart in 1793 (Smith died in 1790) in an Appendix to my volume, 'Adam Smith's Losty Legacy' (Palgrave 2005: ISBN 1-4039-4789-9) which I believe was his defence against early charges of plagiarism against him, though usually (mis)attributed to him as an accusation of the plagiarism of others of his work. Therefore, I will come back to this aspect of Rothbard's (and Professor Salim Rashid's) accusations against Smith at a later date.

Meanwhile any comments you have can be sent to me at: gk@ebs.hw.ac.uk

Thursday, January 19, 2006

The Myths of Murray Rothbard (Part 4)

To conclude the discussion on Smith’s alleged plagiarism of the division of labour (suitably answered in earlier comments) I shall turn to Murray Rothbard’s own myths. He convinced himself that he had found a ‘smoking gun’ in Smith’s version of the division of labour and his quarrel with Adam Ferguson.

Closer analysis shows Rothbard quiet wrong in his borrowed interpretation from Professor Hamowy’s 'Adam Smith, Adam Ferguson, and the Division of Labour', (Economica, August 1968, p. 253):

Professor Hamowy has shown that Smith did not break with his old friend, as had previously been thought, because of Ferguson's use of the concept of the division of labour in his Essay on the History of Civil Society in 1767. In view of all the writers who had employed the concept earlier, this behaviour would have been ludicrous, even for Adam Smith. Hamowy conjectures that the break came in the early 1 780s, because of Ferguson's discussion at their club of what would later be published as part of his Principles of Moral and Political Science in 1792….

Thus Adam Smith broke up a long-standing friendship by unjustly accus­ing Adam Ferguson of plagiarizing an example which, in truth, both men had taken without acknowledgement from the French Encyclopédie

Admitting that such behaviour would have been ‘ludicrous’ on Smith’s part should have been followed by caution in copying these attributions from Professor Hamowys. I agree that their dispute was not over the principle of the division of labour, because of well-known common knowledge of their prior publication in more ancient writings, as Smith acknowledges in his reference to the pin manufactory example (“Wealth of Nations”, p. 14-15).

But what was it then? Ferguson in his History of Civic Society (1767) introduced the relatively new proposition of the division of labour causing what we now call ‘alienation’, a theme taken up by Smith in Book V of ‘Wealth of Nations’ (1776). If there was to be a quarrel over precedence it was more likely to be the subject of alienation and not the principle of the division of labour. Ferguson’s references to alienation pre-date ‘Wealth of Nations’, but they do not pre-date his ‘Lectures in Jurisprudence’ delivered between 1750 and 1764 (and published in an accessible edition by Liberty Fund in1982).

The fact that Smith's lecturers were not published until the end of the 19th century does not disqualify a quarrel over precedence in alienation because several hundred persons heard his lectures, he spoke about his ideas regularly in his clubs and ‘social hours’, and Ferguson mixed in the same circles. The ‘lost’ lectures misled Karl Marx into attributing to Ferguson precedence in ‘alienation’ theory, and describing him as the ‘teacher’ of Adam Smith and also Smith as his ‘pupil’ (Marx, K. 1867. Capital, p. 123, n.1; p. 354; pp. 361-2). But Smith had lectured on alientation many years before Ferguson’s 1767 History of Civil Society (Lectures, LJ[B]: 329, p. 539).

But was it really a quarrel, as Professor Hamowys claims and Rothbard endorses, about the contents of a book Ferguson was to publish in 1792 (Smith died in 1790) , or was it about something else? In the original report of the alleged charges by Smith he is alleged to have accused Ferguson:

of having borrowed some of his inventions without owning them. This Ferguson denied, but owned he had derived many notions from a French author, and that Smith had been there before him’ (Carlyle, A. 1860, 2nd ed. Autobiography of Alexander Carlyle).

It was not just a ‘French source’, but a ‘French Author’, and the best candidate for the author is Baron Montesquieu and his book, ‘Spirit of the Law’ (1748), whose concepts and ideas featured strongly in Smith’s lectures at Glasgow University, which he acknowledged six times (though not a further 20 times). Speech does not lend itself to author citations and, anyway, Smith never edited the students’ notes for accuracy, and his own manuscript for Jurisprudence was burned on his instructions a short while before he died. His lectures were taken down by students and widely circulated – two copies of which were discovered over 100 years later.

Ferguson’s History of Civil Society appeared in 1767 and in its first edition made no acknowledgement of Montesquieu’s work as the source, and Smith would have recognised this deficiency. Indeed, Ferguson published the following bizarre apology in the second 1773 edition:

In his [Montesquieu’s] writings will be found, not only the original of what I am now, for the sake of order, to copy from him, but likewise probably the source of many observations, which in different places, I may, under the belief of invention, have repeated without quoting the author.’

This leaves the final and, if I may opine, gratuitous, false criticism of Smith on trivial arithmetical details (which Rothbard also manages to get wrong!) of his famous pin manufactory example in ‘Wealth of Nations’:

There is strong evidence that the 'French source' for both writers was the article on Epingles (pins) in the Encyclopédie (1755), since that article mentions 18 distinct operations in making a pin, the same number repeated by Smith in the Wealth of Nations, although in English pin factories 25 was the more common number of opera­tions.’

What are we to make of this ‘evidence’? Is Rothbard arguing that the alleged discrepancy between 18 (Encyclopédie) and 25 (England) shows he had caught out Smith in a borrowed example? A closer reading of the passage in ‘Wealth of Nations’ suggests otherwise.

First of all the ‘18’ operations are reported to have been ‘very often taken notice of’ (p.14), i.e., sufficiently familiar to be common knowledge by 1776 (21 years after the Encyclopédie article in 1755). Then Smith goes on to describe a ‘small pin manufactory, which he states emphatically: ‘I have seen’ (p.15) and Rothbard questions the veracity of this statement and adds by implication to his charges that Smith was also a liar. Smith’s actual statement says that he saw:

a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in day; that is, certainly not the two hundred and fortieth, perhaps not four thousand eight hundred part of what they are at present capable of performing, in consequences of a proper division and combination of their different operations” (WN I.i.3. p. 15).

The pin manufactory he describes in detail does not include anything about how many operations are involved, other than that the ten men included among them ‘some of them [who] consequently performed two or three distinct operations.’ The ‘18’ operations cited by Rothbard as ‘evidence’ comes from earlier sentence in the paragraph.

So what is Rothbard’s ‘evidence’ for his gratuitous and false implication that there was something untoward in Smith’s account of what he saw? Rothbard’s assertion is that ‘the same number [18] is repeated by Smith in the 'Wealth of Nations’ and shows he has caught himself Smith out, because ‘in English pin factories 25 was the more common number of opera­tions’. Unfortunately, Rothbard didn’t catch anybody but himself out in his (careless) misreading of Adam Smith, and, er, by the way, I note that Rothbard gave no citation for this statement about ‘25’ operations been more common in England (Smith incidentally lived in Scotland).

It is clear that Rothbard did not read this Chapter in “Wealth of Nations” with enough care (though he describes it has the book’s most ‘famous’ paragraph!) whilst in pursuit of his intemperate objective of accusing Smith of falsehoods. His normal standards of scholarly accuracy had slipped severely on this occasion.

I shall call these pieces, when I collect them together, “The Myths of Murray Rothbard: a reply to the Myths of Adam Smith’”. I wonder if the Ludwig Mises Institute will publish them?

Wednesday, January 18, 2006

Reply to Rothbard on Adam Smith - 3

Murray Rothbard asserts the following unfair criticism and an elementary error:

In addition, Smith failed to apply his analysis of the division of labour to international trade, where it would have provided powerful ammunition for his own free trade policies. It was to be left to James Mill to make such an application in his excellent theory of comparative advantage. Furthermore, domestically, Smith placed far too much importance on the division of labour within a factory or industry, while neglecting the more significant division of labour among industries.”

It is not central to my replies to Rothbard on Smith, but it typifies his rhetoric, that he counts as a ‘failing’ in a predecessor, that another political economist 50 or more years after he died, had ‘been left’(?) to apply a theory which his predecessor had not created on his own account. That John Stewart Mill elaborated on a concept on the back of David Ricardo’s work is highly commendable (that is how science progresses and evolves), but if we are to blame all predecessors for not anticipating our insights in the centuries that follow them (and us!) we must have a pretty jaundiced view of the practice of science.

But look closely at the main charge against Smith. Rothbard asserts he ignored the division of labour in ‘international trade’ and ‘the more significant division of labour among industries.’ What breathtaking forgetfuness on his part – it cannot possibly be caused by Rothbard’s ignorance, for his reputation as a major scholar in economic science rightly remains untarnished. The famous ‘pin factory’ (of which more later) was not the sole reference to the division of labour in “Wealth of Nations”. It was only one ‘trifling’, one-paragraph example, chosen I suspect to illustrate the principle of the division of labour and not to exhaust it (WN I.i.3, pages 14-15).

In the very next paragraph(!) (WN I.i.4: page 15) Smith writes:

In every other art and manufacture, the effects of the division of labour are similar to what they are in this very trifling one… The division of labour, however, so far as it can be introduced, occasions, in every art, a proportionable increase of the productive powers of labour. The separation of the different trades and employments from one another, seems to have taken place, in consequence of this advantage. This separation too is generally carried furthest in those countries which enjoy the highest degree of industry and improvement; what is the work of one man, in a rude state of society, being generally that of several in an improved one…. The labour too which necessary to produce any one complete manufacture, is almost always divided among a great number of hands. How many different trades are employed in each branch of the linen and woollen manufactures, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, to the dyers and dressers of the cloth!”

For Smith his survey of the application of the division of labour in mid-18th century Scotland, and what we now know, but nobody did at the time, was only the beginning of a deepening of commerce and industry on a scale unprecedented in all of history that has not stopped yet, concerned the ‘downstream’ processes of product groups (flax and wool) because these were the most evident examples of the division of labour at work in Smith's day. He did not ‘neglect’ the significance of the division of labour ‘among’ industries at all. He wrote about them!

Only seven paragraphs on (WN I.i.11, pages 22-24), Smith develops his lesser known (to those who rely on abridgements and third-hand accounts of what Smith wrote, a charge nobody could make against Rothbard) example of the division of labour, that of the manufacture of the ‘accommodation’ of the ‘common artificer’, which utilises a ‘number of people’ different industries who contribute ‘a part’ to procurements of the common labourer. These people must ‘join their different arts in order to complete even this homely production’, writes Smith, and goes on to elaborate on the different industries ‘in distant parts of the country’ and ‘a great multitude of workmen’ needed to produce by their ‘joint labour’ the common labourer’s woollen coat.

These different industries, allegedly neglected by Smith, include shepherds, weavers, fullers, ‘many merchants and carriers’, commerce and navigation, ship-builders, sailors, sail-makers, rope makers, drugs for dyers (‘from the remotest corners of the world’, introducing an international trade element into his discourse, which Rothbard calls his ‘failing’), tool-makers, makers of ‘complicated machinery’ for ships, millers, and looms, even the ‘shears’ that ‘clip the wool’, miners of coal and ore, builders of furnaces for smelting, timber fellers, charcoal burners, brick-makers,, brick-layers, furnace men, mill-wrights, forgers, smiths, all ‘joined in their different arts in order to produce them’.

Smith, having mentioned the common labourers' other requirements in dress, furniture, shirts, shoes, bed, kitchen grate, tables, furniture, knives and forks, earthen and pewter plates, bread, beer, and glass windows, concludes:

If we examine, I say, all these things, and consider the variety of labour employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilised country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated” (WN I.i.11: pages 22-4).

I shall return to a final aspect of the division of labour according to Rothbard in my next instalment and then move on to other aspects of Rothbard’s myths about Adam Smith.

Monday, January 16, 2006

Ethics and Corporations

Ethics and the corporation are on the agenda. Allen White, co-founder of Corporation 2020, an organisation formed in the United States to “rethink corporate purpose, rights and obligations” offered six propositions to a debate at Chatham House, London.

White’s first proposition was that “The purpose of the corporation is to harness private interests in service to the public interest.” Other proposition covered “fair returns” for shareholders, operating sustainably, equitable wealth distribution, participatory and ethical governance, and the need for companies not to infringe on universal human rights. All very worthy of our attention, but please, no new legislation to make them compulsory, regulated or subject to legal sanctions.

My attention was drawn to Mark Goyder’s report of the debate, published in Ethical Corporation today. It contains this:

In terms quite similar to [Allen] White’s, [Charles] Handy asked: “Is the pursuit of self-interest bound to be for the common good or do we need to recognise that Adam Smith lived in a simpler world, at a time when, for instance, you loved both yourself and neighbours because you knew them and could not ignore them? Do we need new rules for a new and more complicated world?”

Whatever Smith said about what we call CSR today, he did not believe that the pursuit of self-interest automatically led to the ‘common good’. Among merchants and manufacturers it could as easily lead to monopolies, price fixing above the competitive price, and consequences detrimental to the common good of consumers.

Nothing has changed in ‘a new and more complicated world’. People are just the same as they always were and probably always will be. Friends are dispersed among many strangers and the anonymity of markets is no worse than it was in the 18th century. There are just more people alive, not fewer friends.

Adam Smith was not impressed with intentional plans or legislation to ‘harness
private interests in service to the public interest’. Neither should we. They seldom work well and usually have unintended negative consequences.

Sunday, January 15, 2006

Reply to Murray Rothbard 2





Gavin Kennedy

The early chapters of “Wealth of Nations” irritate readers in a hurry to read it like a modern economics textbook, and are often ignored by them. Francis Horner (1801) dismissed the early chapters of having any significance:

“This is a very superficial and unnecessary chapter; all that is valuable in the doctrine of it stated in a single sentence. The disquisition belongs rather to philosophy of the mind rather than to political economy: and as a metaphysical investigation, it is treated in a very slight and unsatisfying manner” (Brown, V. and Taylor, W. B. 1994, The Horner Papers, Edinburgh University Press).

Two centuries later, Murray Rothbard, under the cover of Schumpeter’s authority, dismisses them too. It is his (usual) sweeping opinion that for no “economist before or since did the division of labour assume such a position of commanding importance.” To the extent that this is true it reflects more on the unfortunate neglect of such economists than any obsession Smith may have entertained about the division of labour.

Rothbard considers the division of labour of trifling importance compared to the exaggerated ‘undue’ and ‘commanding importance’ accorded to it by Smith. This is a clear difference of opinion not open to resolution. However, Rothbard goes much further and throws about other, more serious, charges against Smith. Beyond the crimes of exaggeration, Rothbard adds those of downplaying the importance of ‘capital accumulation and the growth of technological knowledge’; not ‘apply[ing] his analysis of the division of labour to international trade; having ‘no inkling of the Indus­trial Revolution going on all about him’; plagiarizing the example of the pin factory from the French Encyclopédie (1755) and shifting ‘the main focus’ of the importance of the division of labour ‘from mutual benefit to an alleged irrational and innate 'propensity to truck, barter and exchange', as if human beings were lemmings determined by forces external to their own chosen purposes.’

After such a devastating broadside from a major post-war figure in Austrian economics, supported by the authority of Schumpeter, a veritable giant of the profession, it may be thought that Rothbard’s abusive rhetoric mustered in his intemperate article was perfectly justified. I think our American cousins call it ‘Slam Dunk’. But Rothbard would have known that economists habitually reading the same sources cut through rhetoric to check the solidity of apparently firm, because considered, assertions, it mattering not a tittle or a tattle to them of the reputations of those making the noise.

This gets to the core of the significance of the division or labour for Smith. He was not writing a textbook, nor a book of ‘principles of political economy’, nor even a tract or pamphlet on a topic of an aspect of political economy (currency, trade or agriculture, etc.,), and nor a set of lectures for a class in moral philosophy. “An Inquiry into the Nature and Causes of the Wealth of Nations” was a considered report answering the question embodied in its title. I have called it elsewhere a ‘one-man Royal Commission’, after the procedure in Britain, by which a government appoints some independent worthies to enquire into a subject of importance (the causes of crime, bad housing, transport, genetically modified foods, drug addiction, and such like) and then publishes their findings a few years later. “Wealth of Nations” should be read with that image in mind.

It is appropriate that Smith opens his report by taking a long view into the evolutionary history of factors bound up with the causes of the wealth of nations. Smith was aware that outside the perimeter of European societies there were very different societies elsewhere on Earth, some with ancient civilisations (India, China) and others commonly referred to as examples of the lives of the ‘Brutes’, or the kind of ‘savage’ societies that once were considered to have been the norm for all humans (e.g., Locke’s assertion in 1690 that in the ‘beginning all the world was America’).

That he leant heavily on the division of labour as a primary cause of the differences between the savage present of existing societies of the Brutes in America and Africa, and the civilised present of Western Europe is justifiable. That he was wrong in details and he knew nothing of the hundreds of thousands of years of the human and proto-human societies as they had evolved, is readily conceded, but other disciplines could now show those economists, who hasten past these insights, some quite fundamental gaps in their understanding of human behaviour, of which subject they (including the Austrians) claim unique sovereignty.
In “Adam Smith’s Lost Legacy” I criticise the extent to which Smith’s name has become ‘practically synonymous’ with the division of labour and the extent of the market, and I try to ‘lay this myth to rest’ in Chapter 26.

That he ignored others who had expressed thoughts of the division of labour is not entirely supported by his text. In paragraph 2 of Chapter 1 of “Wealth of Nations”, we find him drawing attention to previous views on the division of labour. He writes:

‘[The division of labour] is commonly supposed to be carried furthest in some very trifling’ manufactures (clear evidence of others before himself, presumably in the pamphlet literature he does not bother to cite in detail, expressing their views on the division of labour before he did) and he continues in this theme to identify ‘great manufacturers’ that cannot collect all of their workmen into ‘the same workhouse’ in a single place (large workplaces were rare in mid-18th century Scotland, excluding mines), and they necessarily disperse them such that the work is ‘divided into a greater number of parts’ and ‘the division [of labour] is not near so obvious, and has accordingly been much less observed’ (WN I.i.2: p. 14), but certainly observed by others to some extent.

This introduces the ‘pin maker’, but note (read carefully!) he writes that the division of labour in the ‘very trifling manufacture’ of pins ‘has been very often taken notice of’. Again he makes no claim to precedence or pretence at originality. The tense of ‘has been very often taken notice of’ is clear: the ‘notice’ that others took of the division of labour is in the past, i.e., before “Wealth of Nations” (1776); the Encyclopédie was published in 1755, 21 years earlier, and its contents were widely known to those of his contemporaries interested in political economy.

Smith had been teaching the division of labour since he arrived at Glasgow College (1751) and it had been expounded by Francis Hutcheson while Smith was a student (1737-40), and by Plato, William Petty (1683) and many others. Acknowledging well-known observations, well known to his readers, is hardly grounds for accusations of his plagiarism two hundred years later, because in the interim the pamphlet literature had been discarded, except to those with Internet access to libraries which stored copies.

Rothbard makes an extraordinary assertion:

The older and truer perception of the motive power for specialization and exchange was simply that each party to an exchange (which is necessarily two-party and two-commodity) benefits (or at least expects to benefit) from the exchange; otherwise the trade would not take place. But Smith unfortunately shifts the main focus from mutual benefit to an alleged irrational and innate 'propensity to truck, barter and exchange', as if human beings were lemmings determined by forces external to their own chosen purposes.

That it is older is agreed, that it is truer is problematical. ‘Specialisation and exchange’ narrows the domain of the division of labour considerably unless Rothbard insists that the division of labour was confined only to the era of exchange. The division of labour reached its modern fruition in the modern era of commerce, but it had a long history through the four ages of man, from the gathering-scavenging-hunting first stage onwards. Co-operation, an essential ingredient in the division of labour, evolved through the millennia in late proto-human (hominid) society; it did not just appear suddenly and fully operational in early acts of exchange in human society.

Co-operation in the scavenging or hunting game (larger than adult men) required more than one common set of attributes. Age separated man’s universal talents; the young ran faster, had strength and seldom lacked the impetuousness that often passes for courage; the older, perhaps lamer, certainly slower, than the young, and nursing that experience that often passes for guile, fulfilled different roles. These were not necessarily solely innate differences; they were the product of many incidents over their life-times, learned from the accidents of experience.

In an environment where violent predators competed for the same food sources, a division of labour amongst humans had reproductive advantages suitable to drive social evolution (a far faster form of evolution compared to natural selection). Scavenging and hunting big game was dangerous work for puny humans. While multi-tasking was possible, such activities guided by superior intelligence gave humans a competitive edge. Tracking and locating prey (already dead or suitable for killing), trapping and stripping the kill or the abandoned carcass quickly before rival predators, determined an able to kill anything in their way, challenged them for possession, and withdrawing intact, required knappers of stone tools, butchers and carriers, plus noisy skirmishers to keep predators at bay long enough for the others to complete their work. The nature of such work required a nascent division of labour, some elementary forms of organisation and cohesion.

Combined in a group there were many reproductive and survival advantages in divisions of labour, some from innate differences, some not. That Smith asserts the absence of innate differences between porters and philosophers is the result, ‘not so much from nature, as from habit, custom, and education’ is an error regarding the relative importance of nature versus nurture as root causes, but if he insisted that the differences were absolutely caused by ‘habit, custom and education’ he was wrong (WN I.ii.4: pp28-29) That we know somewhat differently today (though in some quarters the issue is still controversial) is a result of two hundred years additional research, and is commendable (education?), but hardly a decisive dismissal of Smith’s complicity in common enough errors of his time and afterwards. (I wish I could feel so certain of everything I assert as Murray Rothbard's self-confidence comes across in everything he asserted.)

What is important is Smith’s denial that the division of labour was ‘derived’ from ‘the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion’ (WN I.ii.1: page 25). He says much the same thing in relation to the origins of language and its evolution. He went on to argue that much the same process is behind the evolution of markets and their workings, though he obfuscated how markets work from using Shakespeare’s metaphor of the invisible hand (Macbeth, 3:2), clouding his clarity with the unfortunate interpretation of those (the majority?) who came to see markets as ‘miraculous’ and mysterious.

Only much later in the evolution of the division of labour from the creation of wealth (the goods created by human toil) spread to a level in which co-operation passed on towards exchange did its linkage to exchange appear. It was the extended families, who created their future histories in the empty wilderness of the Earth, and their descendants who migrated through adjacent territories and then continents until they entered the already occupied living space of other descendants from the same origins in Africa already there, who created exchange possibilities. It was contact amongst long separated human bands that drove social evolution into exchange relationships (and its ever present human phenomenon of violent plunder).

It is here that Rothbard separates himself from Smith’s view of the essential attribute of human exchange. He confuses motive with means; he makes the mistake he accuses Smith of committing. He writes:

simply that each party to an exchange (which is necessarily two-party and two-commodity) benefits (or at least expects to benefit) from the exchange; otherwise the trade would not take place.”

Yes, but: though each party unambiguously “benefits from the exchange”, where did the only practice that could realise the mutual benefits of trading come from, and as important, Mr Rothbard, how does exchange take place without what Smith calls the propensity for bargaining? Is Rothbard suggesting that it came exogenously “as if human beings were lemmings determined by forces external to their own chosen purposes”? Surely not! It must have come from within their attempts to realise the tentative benefits, which Smith suggested was the mechanism for trade – the behaviour that makes it happen:

the necessary, though very slow and gradual consequence of a certain propensity in human nature which has no such entensive utility; the propensity to truck, barter, and exchange one thing for another’ (WN I.ii.1: page 25).

Concentrate your attention on the words: ‘very slow and gradual consequence of a certain propensity’. This fits Smith’s evolutionary social model. It was not a result of a rational decision to exchange which everybody adopted simultaneously after reading von Mises and Rothbard in mid-20th century; humans discovered the alternatives to acquiring wealth they had not created themselves through an evident propensity that was one of the ‘original principles in human nature of which no further account can be given’ because the behaviours of our ancient predecessors did not fossilise and no trace remains. Smith’s other option for the origins of the propensity are ‘the necessary consequence of the faculties of reason and speech’ (WN I.ii.2. p. 25). In short, he did not know which it might have been, or if there was a third option (rational deduction in the Austrian tradition). He did not state that ‘irrational’ propensity was definitely ‘innate’; he did not know for sure and he left the two alternatives for future scholarship.

Two centuries later, Rothbard asserts he knows the answer for certain. And how does he know for certain? Because he thought it through rationally and with the benefit of two hundred years of modern scholarship, held in vast libraries, none of which was available to Adam Smith in Kirkcaldy in 1766, when he wrote the opening chapters of “Wealth of Nations”.

The alternative to bargaining for the benefits was violent plunder, which no doubt many tried instead, some ‘winning’ and as many ‘losing’ (the plunderers were out plundered by their supposed victims). Trading behaviour has always been as a ‘propensity’, not a guaranteed mandate. Where it happened it raised the wealth of its participants, whereas plunder raised the wealth of the ‘winning’ party, net of its real costs – dead and wounded and the ever present threat from surviving remnants of the ‘losers’ - and eliminated any potential benefits from the one-way transactions of the ‘losers’.

Trade does not just take place. It has to be negotiated. The parties have to ‘persuade’ each other to transact (Lectures in Jurisprudence, 1763, vi.56, p. 352). The fact that mainstream economics has ignored Smith’s assessment of the ‘propensity to truck, barter and exchange’ (negotiation) as the fundamental characteristic of trade since he wrote about it over two hundred years ago, is a criticism of economists (including among the Austrian variety), not Adam Smith.

I shall continue this appraisal of Murray Rothbard’s ‘damning’ assessment of Adam Smith in my next contribution and, hopefully, elucidate Smith’s actual views. Those wanting a faster route into what is ahead, see my “Adam Smith’s Lost legacy” (Palgrave Macmillan, 2005,
ISBN 1-4039-4789-9).

Friday, January 13, 2006

Reply to Rothbard on Smith 1

Murray N. Rothbard, a distinguished contributor to the von Mises’ school of Austrian economics has had his essay (billed as the ‘Myth of Adam Smith’) republished from An Austrian Perspective on the History of Economic Thought , (two volumes, Edward Elgar, 1995; Mises Institute 2006).

In, if I may say so, an appropriate Rothbardian fashion (no prisoners, no ambiguity, no wasted prose), the Von Mises Institute announces its publication typical of his fighting style: “In an essay that made his
masterpiece on the history of thought famous, Murray Rothbard argues that Adam Smith's should not be called the founder of economics, nor a theorist who improved on economic science, nor even a consistent defender of the market economy. Rothbard sees him as unoriginal, confused, opportunistic, vastly overrated, and even dishonest. Yet this except is only a tiny bit of what you will find in this 2-volume wonder”.

I have only read, so far, a few of Rothbard’s contributions (I am working my way through von Mises’ “Human Action” amidst my other duties at present) and should not comment at this time until I am more familiar with the Austrian approach, which strikes me as formidable in its certitudes. However, I am familiar with the life and works of Adam Smith and spend a deal of time correcting obvious errors broadcast about him. To that extent I agree that there are many myths about the man, his writings and his ideas, and I could write articles under the title of ‘The Myth of Adam Smith’. My themes would be somewhat different from Murray Rothbard’s and other critics along the same lines, such as Professor Salim Rashid.

Given the length of Murray Rothbard’s slamming critique, I cannot reply to it in the detail it requires in one contribution and I shall return to the other aspects of where I disagree on either Rothbard’s facts or interpretation in future Blogs. While Murray Rothbard (1925-1995) cannot reply, I am sure many of the lively Mise libertarians Blogging today will pile in if they consider my points invalid. I am sure we can conduct the discussion without lacking in manners.

My first point of detail concerns “Sir James Steuart's (1712-80) outdated two-volume work, Principles of Political Oeconomy (1767).” Rothbard treats Smith’s neglect of mentioning Sir James Setuart’s then recently published book as evidence of something underhand and suspicious (so did Rashid), both hinting that this was responsible for Steuart’s book not doing as well as it might have done. I quote from Rothbard:

Sir James Steuart's (1712-80) outdated two-volume work, Principles of Political Oeconomy (1767). Steuart, a Jacobite who had been involved in Bonnie Prince Charlie's rebellion, was for much of his life an exile in Germany, where he became imbued with the methodology and ideals of German 'cameralism.' Cameralism was a virulent form of absolutist mercantilism that flourished in Germany in the seventeenth and eighteenth centuries. Cameralists, even more than western European mercantilists, were not economists at all—that is, they did not analyse the processes of the market but were technical advisers to rulers on how and in what way to build up state power over the economy. Steuart's Principles was in that tradition, scarcely economics but rather a call for massive government intervention and totalitarian planning, from detailed regulation of trade to a system of compulsory cartels to inflationary monetary policy.

Even though Steuart's Principles was out of step with the emerging classi­cal liberal Zeitgeist, it was no foregone conclusion that the work would have little or no influence. The book was well received, highly respected, and sold very well, and five years after its publication, in 1772, Steuart won out over Adam Smith in acquiring a post as monetary consultant to the East India Company.”

Adam Smith was not a Jacobite. His father had a credible record of commitment to the Hanoverian King’s cause and was party to the Unionist shenanigans that led to the merger of Scotland with England in 1707. Yet Smith was not a person to carry differences into personal relationships. His very first published writing was his preface to the publication of William Hamilton’s Poems on Several Occasions in 1748. Hamilton was a Jacobite in exile who was pardoned later. So, Smith had no personal or political reason to ostracise Steuart or his book. Indeed, we know he regularly conversed with him after his discreet return from exile in 1763 and when Smith returned from his Tour of France in 1766. As Smith directed some of his polemics against mercantile political economy in “Wealth of Nations” to confuting Steuart’s ‘false principles’, he hardly ignored Steuart’s book, though he admitted he did this ‘without mentioning’ it:

I have the same opinion of Sir James Stewarts Book that you have. Without once mentioning it, I flatter myself that every principle in it, will meet with a clear and distinct confutation in mine.” (Correspondence of Adam Smith: Smith to William Pulteney, 3 September 1772, no 133, pp. 163-4, Liberty Fund, 1987)

I cannot think of many, if any, occasions in which Smith criticised a living person’s writings by name, though he could be robust with the named writings of those who were dead. It may have had something to do with an old fashioned sense of the proprieties common among gentlemen in 18th-century Scotland. It was quite common in published works, well into the 19th century, for authors to refer to people’s names with most letters blanked out. For example, James Steuart would be referred to as: ‘J-------------t’.

Given Steuart’s theme in favour of mercantile state building, I consider its failure as a book after 1772 had more to do with its contents than to any sales it might have received if Smith had identified it in 1776. It took some time before “Wealth of Nations” made significant sales (a point mocked at by Rashid). From what I know of the various editions of Smith’s book they did not sell like hot cakes (he sent free copies to many important people) and I would wager they made greater sales in later editions in the 19th and 20th centuries than they did while he was alive. When Frederick List published his “National System of Political Economy” (1841) he lambasted Smith’s “Wealth of Nations” because it contained vigorous criticism of mercantile state building, which List saw as the foundation for German unification and nationalism. It consequences were seen in the 20th Century.

Rothbard makes, gratuitously, a side-swipe at Smith containing tendentious implications: “in 1772, Steuart won out over Adam Smith in acquiring a post as monetary consultant to the East India Company.” If this is meant to suggest that Smith had applied for a post with the East India Company in competition with Sir James Steuart and lost the contest, suggesting Steuart was judged the better monetary specialist, it could only convince someone who has no idea of the facts.

For one thing, Steaurt’s book was circulating from 1767 and Smith did not publish “Wealth of Nations” until 1776. For another, the circumstances surrounding Smith’s name lying before directors of the East India Company, who were looking for a specialist to advise them on the currency problem they had in Bengal, rubbish Rothbard’s implications. Smith did not apply for the post, as is clear in his polite remarks to the person who had put his name forward:

I think myself very much honoured and obliged to you for having mentioned me to the east India Directors as a person who could be of any use to them. You have acted in your old way of doing your friends a good office behind their backs, pretty much as other people do them a bad one. There is no labour of any kind which you can impose on me which I will not readily undertake. By what Mr Stewart and Mr Ferguson hinted to me concerning your notion of the proper remedy for the disorders of the coin in Bengal, I believe our opinions upon that subject are perfectly the same” (Correspondence of Adam Smith, Smith to William Pulteney, 3 September 1772, no 133, p. 164, Liberty Fund, 1987)

‘Mr Ferguson’ was Adam Ferguson, and Smith’s spelling of Steuart’s name is how the name was spelt in Scotland, whereas ‘Steuart’ or, more commonly ‘Stuart’, is the English spelling.

And while discussing Rothbard’s resort to a side-swipe’, I shall foolow him and mention the fact that so-called ‘Bonnie Prince Charlie’ was neither ‘bonnie’ (check his portrait) nor a ‘Prince’. He was the foreign-speaking son of the former British King, who had been deposed by constitutional means from the throne in favour of the Hanoverian King William of Orange. 'Carlies' father was a Pretender to the throne; his son’s claim to be a Prince was false (remember the saying that ‘treason never prospers, because if it prospers none dare call it treason’). As for Steuart being ‘involved’ in Charlie’s futile rebellion, he was his private secretary, suggesting a more intimate commitment to the Jacobite cause than merely being ‘involved’ in it. Many thousands were ‘involved’, but few of them became a ‘private secretary’ to its leader.

I intend to work my way through Murray Rothbard’s article in future Blogs.

Thursday, January 12, 2006

Populist Policies Slower than Proper Policies

After Katrina and the sudden hike in oil prices, two kinds of people allied themselves in a serious case of panic and hysteria: senior populist politicians (State Governors and Senators) showing new degrees of professed ignorance and some self-labelled ‘enviornmentalist’ pressure groups doused in poor economics.

I discussed examples of their wares here at the time, damning them for turning their backs on the workings of markets to the theme of ‘where ignorance predominates, stupid policies assert themselves’, and also praising those few, calmer individuals (but not enough of them in high places) who explained the correct economics, honestly and clearly.

Giles Whittel in today’s Times (London) writes a striking piece, “Shh! Why I secretly fancy Gazprom”.

Aparently, Giles Whittel bought shares in an environmentally friendly fuel cell business in Canada during the post-Hubbert (‘oil has peaked’) years after 2001. The rest he relates in this article:

“I went out and spent $5,000 more than I could afford, which is to say $5,000, on shares in a Canadian fuel cell company.

The first sign that this may have been unwise was the failure of dozens of excited forecasts of the death of oil to come true. These forecasts were based on M. King Hubbert’s theory of “peak oil”. Mr Hubbert, an American geophysicist of unimpeachable integrity, correctly predicted that domestic US oil production would peak around 1970 and go into steady decline as the US oil industry found more lucrative uses for its profits than ploughing them back into domestic oil exploration. Others used his methods to predict a global production peak in 2000 — but it didn’t happen.

Instead, with Adam Smith smiling thinly from his grave, fears that oil may be about to run out have so far translated swiftly into higher prices, funding a successful hunt for more of it. Hence BP’s deep-water rigs off the island of Sakhalin in the Russian Far East. And the ingenious bendy bore-holes on Alaska’s North Slope that vastly expand the Prudhoe Bay oilfield without needing a single new drilling rig. And the reclassification of Alberta’s 300 billion barrels of sticky, hard-to-get-at oil-sand oil as “recoverable”. And, in a roundabout sort of way, the fact that my fuel cell shares are now virtually worthless.”

Most economists correctly predicted how markets would react to the higher prices. Producers would seek substitutes, users would ration themselves. No need to panic.

Need I say more?

Read Whittel’s article at:
(January http://www.timesonline.co.uk/article/0,,1072-1981134,00.html)

Wednesday, January 11, 2006

Punchy Good Sense from South Africa

“Has anyone read an economic textbook lately that recommends subsidising the wealthy? Researchers wishing to know how it is done should examine the operations of South African Airways (SAA). They subsidise wealthy passengers, which flies in the face of both rational economics and social policy.”

What a great intriguing question from Jasson Urbach, a research economist with the Free Market Foundation, whose article explains “Why South African Airways belongs in private hands.” It is published by Moneyweb (‘your trusted friend on the Internet’) in South Africa. Check his article by visiting: http://www.moneyweb.co.za/economy/soapbox/782348.htm

Jasson Urbach continues:

“Most of SAA’s passengers are discerning business people who value the frequency, convenience, punctuality and reliability of flights. However, according to the latest financial release, SAA recorded an operating loss of R240m. If government covers the loss, as it has done in the past, taxpayers will be subsidising affluent people who don’t fly on low cost carriers.”

And he comments:

“Adam Smith, David Hume and other eighteenth and nineteenth century thinkers advanced the case for individual freedom and private enterprise economies. They advocated a system where individuals have the freedom to make the vast majority of decisions that affect them. This preference does not assume that people are always rational and seldom make mistakes, but only that the great majority of people are more rational and make fewer mistakes in promoting their own interests than well-intentioned government officials.”

An excellent summary of Smith’s philosophy, without any semblance of dogma. He makes his assertion and leaves it to readers to make with it what they will. If they ignore it, they spend billions of Rand subsidising SAA’s annual losses at real cost to the South African poor, who need infrastructure investment, not subsidised business-class flights for many more than ‘discerning business people’. Don’t let us forget the numerous politicians, civil servants, bureaucrats and parastatal (quango) employees, who enjoy their class of travel at the taxpayers’ expense and the expense of those poorer people who do without what the subsidies could be funding instead.

Tuesday, January 10, 2006

Disappointing Article from an Austrian Economist

Free-Market News network (“driven by truth”), carried an article (15 December) on “Labour Market Reform and the Dismal Failure of the HR Nichols Society” by Gerard "Gerry" Jackson, described as an Austrian economist), which has just come to my attention. Reading it is like intruding on a private quarrel in which you know little about the personalities, the FEMN or the (allegedly) ‘rightwing’ HR Nicholls Society (Australia). So please forgive me if I get everything about the two contestants completely wrong, though I am confident about my presentation of Adam Smith’s real views.

Gerry Jackson writes:

This brief diversion into economic history was necessary to expose the fallacy of blaming industrial disputation and wage-setting on Marxist thinking. These things were with us centuries before Marx and they will probably still be with us in one form or another many centuries after he is thankfully forgotten.

At the root of the problem is the view that wage rates and profits are indeterminate, meaning that there is no fixed point at which wage rates cause unemployment. We even find Adam Smith sounding like an eighteenth century Justice Henry Bourne Higgins with his opinion that labourers
“should receive a wage sufficient at least to support a standard of living that allows them to participate actively and fully in the community” (“Wealth of Nations”, Liberty Classics edition 1981).

Irrespective of what Mr Evans thinks it was clearly Adam Smith who fathered the “imbalance of power” idea and not Marx. According to Smith:

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into compliance with their terms” (Ibid.).

So we have it from the alleged ‘Father of Economics’: labour is always at a disadvantage that can be corrected only by collective action. Furthermore, Smith argued that the capitalists’ advantage was due to them being “fewer in number”.

However, on reading Smith carefully we find that he contradicted himself on this subject. Although he argued on page 85 of the same edition that in any dispute the “master must generally have the advantage”, he declared in the next sentence that there is
“a certain wage rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.”

This, in my opinion, is an admission that wage rates cannot be permanently forced below their market clearing levels. This is something the thoroughly perplexed Crown discovered in England after the Black Death struck as evidence by the Statute of Labourers Acts of 1349 and 1351.

Unfortunately Smith’s confusion on wage rate determination helped to contribute to the notion of indeterminacy, an idea that even some classical economists had adopted to some degree by the 1860s. Mill’s apparent rejection in 1869 of the wage-fund theory of wages combined with William Thomas Thornton’s attack on competition led him to accept the idea of indeterminacy.”

Let me comment on what Gerry Jackson is saying about Adam Smith’s views on wage determination in 18th century Scotland (not 21st century Australia).

Gerry Jackson writes: “At the root of the problem is the view that wage rates and profits are indeterminate, meaning that there is no fixed point at which wage rates cause unemployment.

This may be true or false, but extrapolating Smith’s views on specific instances is unhelpful. Wage rates are not a monolithic decision for all grades of labour, for all employees and employers, across all sectors in any economy as a result of separate decisions in every case at the same time coinciding. In some research I participated in while an undergraduate in the 1960s into wage rates in small engineering workshops in the same area of Glasgow (some of them in the same street), the same grades of skilled labour were paid different hourly rates in each workshop. We found it true for unskilled labour too. The differences in nearby workshops were known to many of those interviewed, but few reported that they sought to join the higher-paid workers within yards of their current employment, though some did.

In Australia minimum wages rates are set by Federal and State awarding bodies, leaving room upwards for wages rates. I have no information to hand on whether every single engineering employee in Australia receives the same pay, hourly or total in consequence. I would be surprised if they did. Predictable determinacy to a single pay rate seems unlikely and differences within pay bands for any grade of employment seems more likely.

That Smith suggested that labourers ‘should receive’ a wage sufficient to maintain them and their families in conditions considered normal for their communities, does not strike me as odd at all. He expressed an opinion. It was not a statement that all labourers did receive the same, or a sufficient, wage.

Gerry Jackson’s next quotation from “Wealth of Nations” tears it out of context:

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into compliance with their terms” (Ibid.).

Unlike 20th and 21st century Australia, mid-18th-century Scotland was not an environment where impartial High Court Judges pronounced on minimum wages. These were decided by individual employers, often acting in surreptitious concert to hold wages where they were, or to engage in collective decisions to reduce them. On their side they had laws making it illegal for labourers to combine with each other to attempt to raise their wages or to resist their employers lowering them. Moreover, they had relationships as men of property with the local magistrates, who enforced the law on the labourers and their leaders (some of whom visited the colonies at His Majesty’s pleasure, such as the Americas and the Caribbean up to 1776 and, after 1788, New South Wales). Smith’s estimate of the outcome of these unequal conflicts (there were no laws against employers combining) was his point.

This leads Gerry Jackson to write a most strange conclusion:

So we have it from the alleged ‘Father of Economics’: labour is always at a disadvantage that can be corrected only by collective action. Furthermore, Smith argued that the capitalists’ advantage was due to them being “fewer in number”.

Smith said quite the reverse. He thought that Labourers attempting to ‘correct’ this ‘disadvantage’ by "collective action" in the main was futile, because they “generally end in nothing, but the punishment or ruin of the ringleaders” (“Wealth of Nations”, I.viii.13:p 85). By clipping his quotations, Gerry gives a wholly misleading interpretation of Smith’s argument (unbecoming of an Austrian economist).

As for “the capitalists" advantage was due to them being “fewer in number”, Gerry Jackson is wholly misleading. The point was that while it was near impossible for labourers to hide their combinations from the eyes of their employers – they held mass meetings, they created a lot of noise, they demonstrated and paraded their defiance of their employers, and their leaders were easily identified. Their employers met at small private dinner parties away from public view, they agreed quietly and privately, and had no need to exhibit their collusion. So ‘being fewer in number’, as well as having the resources to subsist for much longer periods than labourers who were bereft of income after a week, was a distinct advantage for the employers.

Lastly, Gerry Jackson accuses Smith of a contradiction: there is, he says, “a certain wage rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.”

Let me quote the full statement of Smith:

But though in disputes with their workmen, masters must generally have the advantages, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more: otherwise it would be impossible for him to bring up a family, and the race of workmen could not last beyond the first generation”
(Wealth of Nations” I.viii.14-15, p 85).

Now that alters Gerry Jackson's interpretation of Smith's point I think. There is a wage rate so low that the majority of labourers cannot subsist for long, but there will always isolated instances where somebody in desperation takes the wage cut. For the majority who do not take a cut, child mortality, which hit all families severely in normal 18th century times, would be endemic, driving some to crime or prostitution. On starvation wages, and no wages, his wife and children would be early victims. He too would be vulnerable to illness and disease in a short time too, let alone grief. Has Gerry Jackson any idea of how people lived in the 18th century? Has he a heart of stone?

So whatever Gerry’s argument with HR Nicholls, I am disappointed with his misuse of selected quotations from Adam Smith that misrepresent what he wrote. This is another example of the misuse of his Legacy from a quarter I least expected to hear it from.