Tuesday, February 28, 2006

Smith Looked Backwards, Not Forwards

Following up on my blog on Saturday about Thomas Sullivan (Asheville Citizen Times, NC, USA) and his patriotism, which he believed was shared by Adam Smith in respect of domestic versus foreign markets, I had occasion this last few days to be writing about Smith’s ‘market model’ of society (a theme discussed by Jim Otteson in his excellent book, Adam Smith’s Market Place of Life).

As I developed the theme, it occurred to me that what Thomas Sullivan was contributing to the genre that repeatedly either berates Smith for not anticipating this or that development in economic theory; for example, the assertions of Murray Rothbard, the distinguished Austrian economist, whom I critiqued here during January and February under the title "Murray Rothbard’s Myths", which are also collected together and posted under "Articles" in the left column on the Home Page – or they misappropriate Smith’s ideas to claim that they can be applied to situations two centuries after he died and for which they may no longer be relevant (and often misunderstanding them in the process, too).

Smith wrote his lasting contributions to the history of moral sciences from a distinctive view point. He looked backwards throughout history, not forwards to the future. From the study of history, often beginning with the origins of what he studied, he analysed vast sweeps of human endeavour to seek appropriate generalisations about how the world had worked to arrive at situations prevalent in his day (18th-century Scotland primarily, but also Britain, Europe and the colonies).

He made very few predictions about the future. These can be grouped into those that asserted that unless things changed, his generalisations would continue to work as he outlined, which applied particularly to the behaviours of monopoly, the rulers of mankind and such like, and those few (I can only think of one such at this moment) that asserted a specific outcome for a specific situation.

He did not expect his ideas to be taken as predictions in the common meaning of the word. The one exception I can think of is the one he made about the relative economic strength of the American colonies in one hundred years time (i.e., the 1870s), which he asserted would be ‘perhaps’ (out of habit, his ‘prediction’ was qualified) stronger economically than Britain (Wealth of Nations, IV.vii.c.9: pp 625-6).

If this direction of focus is neglected it leads to errors. Sam Fleischaker puts it well in his new book, On Adam Smith’s Wealth of Nations: a philosophical companion (2004):

Those who make it their business to show how Smith’s principles can explain every

economic phenomenon today may thus not be using Smith’s work as Smith himself
hoped future readers would. They may be betraying their master’s methodological
legacy, rather than preserving it” (p 33).

Sunday, February 26, 2006

Remedies Worse than the Problem

I read small pieces almost everyday on Adam Smith’s alleged views in relation to modern issues, most of which I would find problematical in their assertions. Many of these pieces appear in local newspapers or relatively minor national publications from around the world.

An example of the type of articles in this genre from the last few days:

Daytona-Beach news-journalonline.com (‘the independent voice of Volusia and Flagler counties’) has a piece by Glen Hameroff, a retired high school history teacher, living in Palm Coast, Florida, USA, in which he makes a case, as a life-long free-trade supporter of Adam Smith and David Ricardo, for modifying his stance in view of the current account deficit between the USA and China into something worse than protectionism; it could engulf the world in a bitter, hopefully not hot, war.

His concerns include: “[Chinese] Government interference includes intellectual piracy, currency manipulation, use of prison labor and a complete disregard for environmental safety.” His remedy?

However, if we are going to compete with the Chinese, let us level the playing field. Demand that China cease the use of prison labor. Do not allow China to manipulate the relative value of its currency to create a trade advantage. Insist that China pay royalties for all patent and copyright protected materials. Plead with China to consider the health of its people and start considering the environmental impact of its actions. Finally, provide the American worker with the tools necessary to compete with inexpensive Chinese labor.”

Without being too difficult about it, none of his ‘remedies’ are likely to be attempted. That would require that the USA could tell China what to do in the non-trivial areas of penal management, exchange rates, law reform, social and welfare policy. A pretty tough agenda, involving outside interference on scale that no US government would contemplate if it was ordered by another country’s government to do similarly in the USA.

Neither is it clear what he means by (who?) provides the ‘tools necessary to compete’ with China’s (or anybody else’s) labour. Now that is an interesting proposition, especially from the USA, supposedly a land of free enterprise, which would also be out of kilter with any other country, even in Europe, though perhaps not North Korea. If US enterprises need re-investment in modern (relatively) expensive labour-saving machinery, they should get on with it, without government telling them to do so, or, worse, funding it.

Economies do not change at infinite velocity. They change slowly and by small amounts. Glen Hameroff, like so many contributing to the genre, draw panic-stricken conclusions, adopt unrealistic remedies, most of them worse than the problem in their unintended consequences, and seems to be cocooned from the reality that even the USA, or Europe, or China for that matter, do not control the world, never have, and never will.

Read the article:
http://www.news-journalonline.com/NewsJournalOnline/ Opinion/Editorials/opnOPN81022506.htm

Saturday, February 25, 2006

Nostalgia is Not a Guide to Policy

Page 456 of “Wealth of Nations” probably constitutes one of the most misunderstood pages in Smith’s entire published writings. It spawned an almost religious, certainly mystical, belief in 'invisible hands' (sometimes even called a 'theory') guiding everybody who pursued their self interest to always benign outcomes. The facts is that contrary self-interested actions can also act against, and sometimes savagely, the public good too – think of pollution, fraud, shoddy and dangerous products, and buildings that fall down or deteriorate quickly).

It also is taken up as ‘gospel’ when discussing domestic versus foreign investments. Take this extract from an article today in the Asheville Citizen Times, North Carolina, USA:

We do not begrudge other nations new opportunities. Still, philosopher Adam Smith believed the quaint notion that entrepreneurs prefer investing in “the support of domestic to that of foreign industry.” But that view has become outdated. Country and community mean less now than next quarter’s profits. American working families might welcome some of Smith’s quaint, outdated patriotism about now.”

It was written by Thomas Sullivan, a professional engineer who consults for industries ranging from chemicals to biotech. Its title says much about its theme: “Behind every delusional ‘self-made’ man are the sacrifices and foresight of much wiser people”.

Overall it is a spirited piece on some simple ideas about patriotism, mixed with a bit of nostalgia for the known certainties of yesterday, which every age feels about the past – they know now what happened and they survived, but when it comes to the uncertain future they are anxious because they don’t know what will happen and it always looks as if the present age is unready and unable to cope the way 'we' were in the past age of our youth.

Fortunately, our grandchildren, looking back generations down line will know what happened and so the cycle of anxiety continues.

Adam Smith did not ‘believe’ in ‘quaint notions’. He was a philosopher of the past and present, not a seer of the future. He observed what was happened and what had happened and tried to analyse the ‘connections’ among things and events, and the people in active in them. Page 456 is about individual human motivations and how these have consequences, unintended and unplanned or co-ordinated by the people involved. There were no ‘quaint notions’ shared by entrepreneurs in “Wealth of Nations”.

The consequence of humans preferring to stay close to their families in their homes and close to their investments of their scarce capital stock had nothing to do with ‘preferring the support of domestic to that of foreign industry’. That is not how Smith articulated his assessment. It was the natural human anxiety about their livelihoods being out of their sight. Remember, these were times when capital stock was extremely scarce – a workman’s tools and materials; a horse and cart; farming implements; home based looms; a few pounds in money which they could lend out at interest to someone local whom they knew, or use to purchase sufficient materials from someone else they knew to add value to a line of output under the early division of labour. The amounts were small and being small if they chose wrongly the outcome was not just a loss, but labouring employment if they could get it, or abject destitution if they couldn’t. Risk aversion was high.

In these circumstances, keeping their scarce capital stock within reach and in sight of the others who used it was so fundamental to the cautious entrepreneur (mostly a skilled or semi-skilled tradesman) that it expressed their prudence (“Moral Sentiments”) not their sense of the balance of preferences driven by patriotism.

Only the richest of merchants or manufacturers could risk ventures based on distant sale, especially abroad. Again this was not because of their patriotism – though comfort could be gained if the British Union flag flew over the ship carrying their goods and over the warehouse where they stored their materials in transit – it was about opportunities to make a profit from the transactions.

I suspect that in reality Thomas Sullivan is importing into his argument about Smith’s alleged ‘beliefs’, a modern agenda that includes current concerns about the so-called export of ‘jobs’. How he considers the American colonists would have established their, at times, fragile occupation of the Americas without the export of capital stock (and jobs) from Britain is not stated. I suppose he would answer, but ‘that was then, and this is now’.

Today, there are vast flows of capital among countries. The minimum scale of capital owned by modern day corporations is a long way from the 18th-century early owners of minute amounts of capital stock. Much of US and European investment abroad is owned by US and European firms and the output of these enterprises is shipped back to the countries of origin, appearing in the economic scales as increases in the real wages of their citizens (what you can buy in dollar, pounds or euros). That has got to be a good deal for all participants, because the employed foreigners in their countries earn incomes that enable them to buy US and European products.

Read Mr Sullivan’s article at: (
http://www.citizen-times.com/apps/pbcs.dll/ article?AID=/20060225/OPINION04/60224038/1006)

Thursday, February 23, 2006

Universal peace Requires Universal Acceptance of the Staus Quo

Harold James writes a perceptive essay on peace, commercial society and the ‘Roman Dilemma’ (‘Looking Beyond Conquest’, 23 February). It’s worth reading closely:

As the Bush presidency gets bogged down in the quagmire of Iraq, there is still a widespread assumption that there might be a quick and easy fix. Critics of the administration think that the world’s view of America would be transformed if only the U.S. president sounded kinder. Many officials in Washington believe that if the world understood all they really wanted was peace, prosperity and democracy, the criticism would subside. Such optimistic beliefs are mistaken but are characteristic of an ever-recurring dilemma of an interconnected world. Consider some historical parallels: in 1776, the year of the Declaration of Independence, Adam Smith and Edward Gibbon published the first volumes of two works that both used history to illuminate Britain’s own problems with the globalization of that age: The Wealth of Nations and The Decline and Fall of the Roman Empire. In these monumental and parallel works, Smith and Gibbon explored what could be called the “Roman dilemma.” In essence, how peaceful commerce is frequently seen as a way of building a stable, prosperous and integrated international society. At the same time, however, the peaceful liberal economic order leads to domestic clashes and also to international rivalry and even wars. The conflicts disturb and eventually destroy the commercial system and the bases of prosperity and integration. These interactions seem to be a vicious spiral or a trap from which it seems almost impossible to escape. The liberal commercial world order subverts and destroys itself, and Smith’s gloomy–but surprisingly little known–concluding chapters are a long way from the apparently optimistic beginning, with its focus on the immense productivity gains possible as a result of the division of labor.”

The problem with running a tight connection between ‘peace, prosperity and democracy’ is that all of the social interactions between the participants in the closed system that is the world are not included in the snappy slogans posing as objectives, not processes.

There have always been the problem that bands, tribes, nations may seek power over their neighbours, for protection or conquest, independent of the Smithian stage they are at. In Smith’s time, the political-economy of nation state was dominated by power seeking, not prosperity for all. Smith criticised the mercantile system for these errors that led to long wars and cold peace, plus trade bans, tariffs and preparation for the next war. He suggested a different political economy in which the growing division of labour would lead to opulence and peace. He was familiar with Gibbons ‘Decline and Fall’ and was familiar with the primary sources of the history of the fall of Rome and the millennium of the ‘dark ages’ that followed.

In this century the same issues are present. Mercantile politics and economics still dominate the world in contest with the alternative of free trade. The US and the rest of the West are protectionist (Mercantile politics and economics), as well as claiming to be advocates of free trade. New powers are rising (India and China) and America hesitates to accept them as full trading partners because powerful political constituencies are stirring and shedding their skin-deep free-trade stances (China’s attempt to buy a minor oil company; Dubai’s attempt to buy six US ports).

Also, the desire for peace is compromised by the fact that at root peace is the acceptance of the status quo. Hardly any part of the Earth can be said to be wiling to accept the status quo; indeed, war is about changing the status quo for half the world or preserving it b y the rest. And there are many versions of what the status quo ante should be, with precious few willing to endorse the existing status quo. Indeed, question closely all those in favour of ‘peace’ and you will soon find long agendas that favour changes in the status quo – then they will accept peace, which means wars will continue.

Harold James’ ‘Roman dilemma’ is a neat way of putting it; it could not be resolved (that’s the nature of a dilemma) therefore unresolved it led to the post-Fall millennia of Europe’s dark ages. ‘Smith’s gloomy–but surprisingly little known–concluding chapters’ is a strange way of putting it. Book V is about the duties of government, the first being the protection by means of a military force of the people from the depredations of barbarous neighbours. I didn’t realise they were ‘little known’ and I shall have to ponder over this.

Commercial society, based on voluntary trade, in which the outcomes are non-zero sum, is not strong enough to sweep all before it into a peaceful, prosperous society, based on low flat taxes, justice and security. Smith did not expect free trade to be restored in Britain this side of utopia. This looks strange in Wealth of Nations, but when you think about it, perhaps Smith was more realistic than he has been credited so far.

Harold James is professor of history and international affairs at the Woodrow Wilson School, Princeton University, and the author of The Roman Predicament to be published in May by Princeton University Press.

Read his article in Tom Paine common sense: ‘the best progressive insight and action.’ At:


Smith Cautioned: 'Don't Panic!

Talk about getting something wrong; here’s George Will getting it wrong. He writes a lively piece on the differences between liberals and conservatives (on the US political scale) and supports the idea that conservatives are happier than liberals, who are ‘grim and scolding’. I quote:

Begin with a paradox: Conservatives are happier than liberals because they are more pessimistic. Conservatives think the Book of Job got it right ("Man is born unto trouble as the sparks fly upward"), as did Adam Smith ("There is a great deal of ruin in a nation"). Conservatives understand that society in its complexity resembles a giant Calder mobile -- touch it here and things jiggle there, and there, and way over there. Hence conservatives acknowledge the Law of Unintended Consequences, which is: The unintended consequences of bold government undertakings are apt to be larger than, and contrary to, the intended ones.”

I have nothing to contribute to the question of which political group is the happiest (frankly the question is not worth spending any time upon). But to buttress his case – or fill column space – George Will drags Adam Smith into the argument. Now, while Smith was definitely not a Tory (an 18th-century conservative) and he may have tended slightly towards being a Whig (an 18th-century liberal-minded MP), at least on the issue of Kings having no divine right to rule, which contemporary Tories of his day asserted noisily and Smith denied firmly. Smith, therefore, has no useful role as an advocate for against the proposition: which 21st century Conservatives or Liberals are the laugh most?

Worse, if George Wills is arguing that Smith’s comments about the ‘ruin of a nation’ helps him make the case that Conservatives believe that ‘Man is born unto trouble as the sparks fly’ he bags the wrong quotation from Smith.

Smith replied to a correspondent,John Sinclair of Ulbster, who reacted entirely negatively to a then recent reverse for the British in the war with the American colonists, after the surrender at Saratoga, and wrote to Smith saying: ‘If we go on at this rate, the nation must be ruined.’ Like many of that frame of mind, he saw disaster at every step, much as young environmentalists see catastrophe and pending doom for the world.

Smith replied: ‘Be assured, my young friend, that there is a great deal of ruin in a nation’.
(See Adam Smith’s Correspondence, Liberty Fund edition, page 262, footnote 3, or Ian Ross, The Life of Adam Smith, Oxford University Press, page 327).

Was Smith endorsing the pessimism of his young friend? Was he exhibiting Conservative or Liberal attitudes to events? I do not think so in regard to either question.

He calmed the young man’s fears, even his panic, at reverses, and pointed to the fact, still true today, that catastrophes are never as awful as they seem at the time, and over reaction to them is seldom the best policy. Which suggests that Smith was more of an optimist than a pessimist, and his optimism, I suggest was founded on his vast historical vista of history, his knowledge of classical times of ancient Rome and Greece and the millennium that followed, and his acute observations of how people behaved in the long past, and probably will behave in the future.

Read the article at: Washingtonpost.com: George F. Will: ‘Smile if (and only if) You’re a Conservative’ 23 February

Right-Thinking is not Right- or Leftwing

Quoted by Alex Singleton of The Globalisation Institute (http://www.globalisationinstitute.org/blog/) from an article by Andrew Mitchell, MP in Platform at ConservativeHome.co.uk (http://conservativehome.blogs.com/platform/2006/02/andrew_mitchell.htm):

Think of the poorest person you have ever seen, Gandhi would say, and ask if your next act will be of any use to him. Will stopping poor people from trading with each other help them? No. Will stopping them voluntarily exchange goods and services with people in rich countries help them? Of course not.

Poor people should be free to trade with each other, and they should be free to buy and sell from us in the West. As long as the exchange is voluntary, no trade will take place unless both parties benefit from it. That is the beauty of trade: it is not a zero-sum game, in which one party must win at the expense of the other. Would anyone seriously suggest imposing tariffs or quotas between, say Surrey and Sussex? Or Manchester and Liverpool?

What eminent good sense this is!

Yet, The Globalisation Institute is described by Hugo Rifkind (The Times) as “a right-on, right-leaning think-tank on world poverty” (February 21, 2006)

I don’t know about ‘right-leaning’, but I would have called it a ‘right-thinking think-tank’ for the very high standard of what it reports and implicitly advocates. I should hope that ‘left-thinking’ sympathisers of the poor trapped by both domestic (insane) protectionism of their rulers against other poor neighbours and the pathetic protectionism of rich farmers and manufacturers against them in the West, would endorse most of what Alex Singleton’s team support.

The issue is not that all forms of protectionism should be abolished immediately – Adam Smith advised that free trade be established gradually to avoid the burden being felt in one go by those who benefit from it continuing – but what steps are to be taken over what time period to bring it, and its benefits, is a matter for the use of good sense, not ideology.

Where the people affected directly are a small minority and the proportion of annual output they account for is also small, the rest of the community can assist them to adjust to a relatively short timetable. This would be cheaper, make more sense and do more good, that sending tens of millions in so-called aid to political regimes who are a contributory cause of the very poverty their fellow-citizens, not them, endure unnecessarily.

Wednesday, February 22, 2006

Before Repeating Flippant Remarks about Economics, Check your Sources (try Google!)

In ChristianityToday.com (http://www.christianitytoday.com/bc/2006/001/18.34.html)
Kenneth G. Elzinga reviews Benjamin F. Friedman's
The Moral Consequences of Economic Growth.

The first thread in Friedman's analysis is the conventional wisdom in economics. This idea goes back to Adam Smith: the wealth of a nation consists of its goods and services, not its gold. Today, an economics teacher might simply state what seems obvious (at least to economists): expanding a consumer's choice set necessarily makes the consumer better off (or at least no worse off, since the consumer can always choose the original choice set).

Today the conventional wisdom is often criticized. At one time, those opposed to what Adam Smith called the "obvious and simple system of natural liberty" faulted the market system for producing too little. That was the old-fashioned case against capitalism. Today, anti-growth environmentalists and small-is-beautiful advocates fault the market system for producing too many goods and services. Once scarcity was bad. Now abundance is. Once the market system provided too few choices; now it produces too many.

More than a century earlier, Carlyle wrote with distaste about the "cash nexus" that connected people in a market economy.

As I read Friedman's book, I wondered how many of my colleagues in the dismal science could differentiate between premillenialism and postmillenialism.”

In a review written by a self-proclaimed Christian in a Christian newspaper, should I be surprised that casual reference is made to Thomas Carlyle and his now famous, but obscure in its origins, quip about economists and the ‘dismal science’?

Most people since who repeat Carlyle’s quip, believing that he called political economy dismal because of the alleged dismal pessimism of Robert Malthus, and sometimes because of the alleged cold lack of compassion of Adam Smith.

For a recent corrective exposition of the non-pessimistic views of Malthus, see Sandra Peart’s Blog, Adam Smith Lives! (listed among the Blogs we recommend in the left column). For the alleged cold lack of compassion of Adam Smith, read abundant evidence to the contrary in Adam Smith’s Theory of Moral Sentiments (1759).

For an accurate account of why Thomas Carlyle was describing economics as the dismal science see:

http://www.econlib.org/LIBRARY/Columns/LevyPeartdismal.html and also: http://www.economics.unimelb.edu.au/TLdevelopment/econochat/Dixonecon00.html

Carlyle was not writing about ‘dismal’ political economy. He wrote a pamphlet entitled: Carlyle, T. (1849), Occasional Discourse on the Negro Question, Fraser's Magazine, 40 (December): 670-9. Reprinted in Collected Works of Thomas Carlyle, Volume 11, 171-210.

Caryle's disgraceful outburst also appeared as pamphlet in 1853 in London with the ‘the Negro Question’ changed maliciously to ‘the Nigger Question’. In it Carlyle refers to Caribbean black slaves as ‘two-legged cattle’ and defends slavery by the white plantation owners. He considered political economy ‘dismal’ because John Stuart Mill considered slavery was wrong and that blacks and white were of the same race, the human race, and that they should be freed. So much for a much-lauded English Man of Letters.

Of course, Benjamin Friedman was not a party to any of Carlyle's racist nonsense and his book, The Moral Consequences of Economic Growth, is well worth reading.

Perhaps Kenneth G. Elzinga might wish to reflect on his flippancy about the dismal science of political economy?

Tuesday, February 21, 2006

Morality and Enterprise: a View from Forbes

“A Different Kind of Invisible Hand: profits alone don’t determine success”

The headline grabbed my attention, so I followed the source to find a report on
Forbes publisher, Rich Karlgaard (20 Feb), speaking on “AlwaysOn: the insiders network” which puts a case for a moral basis to capitalism. By moral he seems to be talking about Christian morality and it seems to be semi-religious meeting, judging by the evangelical bio-confessions of other speakers:


Rich Karlgaard says:

Capitalism is a wonderful system. But it’s a system that is very much—as Churchill said about democracy—it’s the worst system that anybody could come up with except for all others.

The angriest mail that I get in response to columns that I write at Forbes, other than recommending tech stocks at the top of the bubble, are not from people who are anti-capitalists and left of center. I mean Forbes is a pro-capitalist, right-of-center magazine. They are not from people who are anti-capitalist and left of center. They are actually from a kind of Ayn Rand libertarian type whenever I write a column talking about the importance of morality in capitalism and how the two work together. A free enterprise will perish in two generations if it doesn’t have the underlying foundation of morality. That isn’t true [they say], capitalism is morally sufficient on to itself. And they never make the argument. They say because Ayn Rand said so.

It is just sort of an amazing little cult out there. But there are a lot of kind of what I would call soft libertarians out there who kind of believe the same. And I think the mainstream media is guilty of portraying capitalism as this kind of individual pursuit of greed and somehow it all works together. That is a complete misinterpretation of what Adam Smith said.

Adam Smith wrote lengthily about the necessity for capitalism existing on a moral basis.”

Well, it’s not quite a rebuttal of the usual reference to the invisible hand, but it makes a valid point about Adam Smith and his moral foundations to behaviour, including in markets and clearly rejects those notions, fed by Hollywood about ‘greed being good’, which are totally at variance to Smith’s approach, though often attributed to him.

Of course, Adam Smith never “wrote lengthily about the necessity for capitalism existing” on any basis, let alone on a ‘moral basis’. He knew nothing of the phenomenon of 19th-century capitalism; he wrote about 18th-century commercial markets. People who assert he did write about capitalism, including scholarly academics, are back-projecting phenomena of which Smith knew nothing.

Of interest, however, in Rich Karlgaard’s article is the following extract, further down the page:

Very interesting to see what Rick Warren is doing now in Africa; now that he’s achieved about everything that he can with saddleback and his purpose-driven mission in the United States, he has turned his attention to Africa, where there is this intractable poverty. His test case is Rwanda, and his plan is to bring together government, business, and faith-based organizations to bear on these deep, deep problems of poverty. And it won’t work without all three because all three must come together on this. I was talking to Rick recently and I love what he said about this notion of free enterprise and capitalism: 'That we were created in God’s image; we were created by a creator; ergo we were born to create.'

And that is what the free enterprise system allows us to do. He talks about not just giving men fish and not just teaching them to fish. Because in today’s modern economy we need to teach them how to process fish; distribute fish; get fish into the supply chain; sell fish. He says people in Rwanda, even after all of the carnage of the 90s are actually very self sufficient. The problem is they are all doing the same thing. You drive down a road and everybody is selling the same agricultural produce. So you’ve gotten to the level where you have a sustaining economy at some kind of a level, of subsistence economy—there’s the word—but not anything that can grow and improve people’s lives.”

Millions sent in aid or grants to African governments by rich country governments are usually wasted (and are re-routed to private accounts in rich country banks). Infra-structure investments by NGOs and charities (not the funds diverted into political campaigns in western countries, which do not build a single useful thing in poorer countries) are partially useful but not entirely, given the corruption, state interference and lack of markets in Africa.

Africa needs domestic markets based on the division of labour from ever deepening as markets for basic items grow. These require peace and institutional changes at the grass roots, the eradication of barriers to their trade, including ridiculous regulations, red tape and licensing, let alone criminality and a corrupt justice system. The point about Rwanda is well put and taken.

It might take a while longer to work on Rich Karlgaard’s partially correct views on Adam Smith.

Monday, February 20, 2006

Busy Shops or Voting Most Conducive to Peace?

Is it democracy or wealth that promotes peace? Middle East Forum – ‘promoting American interests’ (Winter 2006) – publishes a series of articles addressing the conundrum between democracy and wealth.

Among them is an article by Martin Sherman (Tel Aviv University, and author of ‘Despots, Democrats and the Determinants of International Conflict’, St Martin’s Press, 1998), entitled: ‘What Brings Peace, Wealth of democracy?’ (from Middle East Quarterly, 1998).

It is an excellently argued article. Included is an exposition of the economic argument:

Economic. Adam Smith warned of the perils of penury, cautioning that "No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable."5 In line with this sentiment, the advocates of the economic paradigm see the creation of greater wealth as the preeminent factor for the achievement of political stability. In the words of Shimon Peres, the "higher the standard of living rises, the lower the level of violence will fall."6 This outlook derives from a view of man as homo economicus, a being whose conduct is dictated by a desire to maximize his utility as a consumer of goods and services. Satisfaction of material needs will generate contentment, thereby reducing the incentives for violence. Conversely, frustration of this desire generates a sense of deprivation that is liable to lead to interstate conflict as governments try to deflect the blame for the nation's plight away from themselves and channel public anger against some external enemy—whether real or contrived.
Proponents of this view hold that violence harms prosperous states more than it does impoverished ones. For example John Mueller, professor of political science at Rochester University, suggests that "As countries raise their standard of living . . . they will find the prospect of war decreasingly attractive because they will have more to lose."7 Since greater economic development implies more elaborate and interlocking commercial links, the structure of the world economy implies that economic and financial disruptions resulting from war are liable to be far more severe for wealthy countries than for poor ones. Accordingly, greater wealth will purportedly lead to greater stability

Discussing this important question (and not just one for the Middle East) is beset with problems. Each situation, in each time period where it is relevant, is subject to changing dynamics, not fixed states in which universal maxims and choices can by applied. Examples of various combinations of wealthy and poor nations, and democratic and totalitarian regimes, can be adduced which support or contradict simple explanatory hypotheses that sum to a single word like ‘democracy’ or ‘wealth’.

Richer countries attack poorer countries (Germany v Poland/Russia) and poorer countries attack richer countries (Japan v USA). All countries engage in defence expenditures (because defence, while expensive, is cheaper than war) and ‘defence, however, is of much importance than opulence’ said Smith (Wealth of Nations, IV.ii.30: 464-5). Given the government’s first duty, ‘that of protecting the society from the violence and invasion of other independent societies, can be performed only by means of military force’ (WN V.i.a.1: 689), it follows that richer countries can allocate larger absolute amounts of annual resources in preventing (defence), preparing and conducting wars that poorer countries.

That their economic interests conflict with their political interests is part of the rich tapestry of the choices facing governments of all hues and states of wealth. As African poverty deepens, a small body of armed men, suitably led, can seize power and help themselves to the fruits of statehood, even if (perhaps especially if) the general economy is dominated by abject poverty.

In the context of terrorism, even smaller groups of determined men and women can exert disproportionate influence on choices and have disproportionate influence on general poverty. Long-lasting low-intensity warfare is cumulatively as disastrous for a county’s infra-structure as a short technologically biased war. Unrepaired roads after a year or so become as bad as roads with bridges blown up by missiles from fast-jet aircraft. Lightly armed ‘soldiers’, who extract ‘local taxes’, soon deter all but the most hardy of commercial traffic.
The poorest countries may go to, or threaten to go to, war over the most frivolous of reasons (set against their real problems) – taken deadly serious by the contenders – such as India-China in 1962 and Eritrea-Ethiopia 2006. Contrasting these unhappy outcomes with two wealthy countries (Germany and Britain, 1939-45), we realise that wealth is a moving characteristic. European countries in the 1930s were poor compared to 2006, but wealthy by contemporary standards at the time.

We should also be careful with linking Smith’s name with today’s neo-classical assumptions:

This outlook derives from a view of man as homo economicus, a being whose conduct is dictated by a desire to maximize his utility as a consumer of goods and services.”

This was not Smith’s assumption. He did not formulate his assessment of human motivations in that manner, not even when he examined motivations in “Wealth of Nations”.

That all persons sought to ‘better’ themselves he did not doubt; that it was the sole or major motivation is not established merely by assumption and ascription. Homo economicus is a post-Smithian assumption that leads to false ideas that human exchange behaviour is motivated by selfishness, a wholly misleading notion when attributed to Smith.

Sunday, February 19, 2006

Wholly Wrong or Holy Wrong is still Wrong

ZENIT, an International News Agency (‘The World Seen From Rome’) with the mission: “to provide objective coverage of events, documents and issues emanating from or concerning the Catholic Church”) published on 18 February an article, ‘Capitalism in the Dock: Debate Continues Over Effects of the Market’. In the article ZENIT discusses four books in a fluent, fair and focused review of problems, as seen by the Roman Church, associated with markets, or more correctly, capitalism.

The four books discussed are:

1 "The Battle for the Soul of Capitalism" (Yale University Press), John Bogle. Zenit reports that John Bogle:

“analyzes what he considers to be crucial failings in the financial markets. Bogle, former chief executive of the Vanguard mutual fund group, wants the system to be run in the interests of the shareholders and owners, rather than the managers;”
2 "Capitalism's Achilles Heel" (John Wiley & Sons) by Raymond Baker, ex-businessman and current guest scholar at the Washington, D.C.-based Brookings Institution’. Baker, Zenit reports:

“draws attention to problems such as bribery, money laundering, tax evasion and income inequality;”

3 "The Ethics of the Market" (Palgrave) by John Meadowcroft, deputy director of the London-based Institute of Economic Affairs.

Zenit says Meadowcraft argues that:

“the market is an important school for virtue, and that participation in a market economy strengthens rather than weakens institutions such as the family. The market does not impose a specific set of values. The market mechanisms as such, Meadowcroft observes, can be used just as easily by selfless altruists as by selfish hedonists;”

4 “The Compendium of the Social Doctrine of the Church” recognizes:

“the positive role played by markets, which allow economic potential to be developed efficiently. Yet, the Compendium urges that people also need to remember aspects such as ensuring justice and solidarity. They must avoid the error of seeing the accumulation of material goods as the only end of their activity.”

Read the article at: http://www.zenit.org/english/visualizza.phtml?sid=84684

Of interest to Lost Legacy readers, the article contains these two paragraphs:

By requiring people to continually review their ends in the light of information about others, communicated through price signals, the market coordinates a myriad of competing ends and values into coordinated economic activity.

In this sense, it is not correct to think of the market operating, as Adam Smith described it, through self-love. It is not selfishness that drives the market. Rather, individuals are motivated to respond to the price signals generated. Economic coordination depends on people being alert to these signals, whether the ends they seek are selfish or altruistic.”

Adam Smith never asserted that ‘selfishness drives the market’. This is an error read into Smith’s ‘Wealth of Nations’ by confusing his use of ‘self-love’ (self-interest) with ‘selfishness’, and by taking selfishness as a motive for behaviour to an extreme. Smith taught moral philosophy at Glasgow University and within his classes he also taught jurisprudence and political economy, as was the norm in Scottish Universities in the 18th century. He taught the four subjects in tandem to the same class of students and did not consider them wholly separate.

Man as a social animal was not moral in one field and amoral in the other. Such a contradiction would have stood out for Smith (and his students), should he have been prone to teach it. He carefully stated his disagreements with Bernard Mandeville’s theme that selfishness was a public virtue because of its consequences (Fable of the Bees, 1705, 1714, 1724) in “Moral Sentiments” (1759) and he disagreed with his mentor, Professor Hutcheson, who argued that only unsullied benevolence was a virtue, anything less was vicious. Smith saw a virtuous role in self-interest – he instances a father who acts in his self-interest to earn money to feed his family.

Now, if ZENIT wishes to argue against selfishness in market dealings it may do so, but without dragging Adam Smith’s name into its case as if Smith was party to any notion that selfishness had a legitimate role in markets. On this count, ZENIT may call on Smith’s name to support the view that selfishness if not appropriate in markets; indeed, that ZENIT may quote Smith’s contrary assertion that mediated self-interest through bargaining (“Wealth of Nations”, Book 1) is appropriate in markets and therefore is a legitimate source for arguments against selfishness.

I suggest the worthy people at ZENIT read Adam Smith before making these wholly wrong assertions about his stance on the morality of markets.

Saturday, February 18, 2006

No Monopoly on Sentiments

Adam Smith’s “The Theory of Model Sentiments” (1759; 6th edition 1790) is kept in print partly by the reputation of the author, partly from the curiosity of modern philosophers, but mostly by the availability of a perfect facsimile of Oxford University Press’s authoritative 1976 Glasgow Edition from the Liberty Fund, Indiana, at a fraction of the OUP price (check it out at Amazon – better still, order a copy today).

The first paragraph on the first page is its most famous quotation might (cynicism might suggest many people only read that far):

How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” (TMS I.i.1.3: p 9)

Another step in Smith’s argument is often missed (it’s on the next page!):

Pity and compassion are words appropriated to signify our fellow-feeling with the sorrow of others. Sympathy, though its meaning, was, perhaps, originally the same, may now, however, without much impropriety, be made use of to denote our fellow-feeling with any passion whatever.” (TMS I.i.1.5, page 2)

This is byway of my introducing an interesting piece from Chris Armstrong: ‘For Sentimental Reasons: how the emotional stories of Christian preachers and writers shaped a movement’ in Christianity Today, 13 February.

Chris Armstrong writes:

In fact, these two impressions derive from a single "sentimentalist" agenda at work in the novels of Dickens, and in hundreds of other 18th- and 19th-century novels, as well as period biographies and histories. This agenda was the brainchild of the group of 18th-century philosophers and writers who in fact invented the novel as a genre.

These sentimentalists included philosophers such as Adam Smith, novelists such as Samuel Richardson, and, at one point in his career, the philosopher/ historian David Hume. To these thinkers, the term "sentimentalism" did not carry the meaning that it does now—of over-wrought, insincere emotional expression. Rather, it named a coherent set of philosophical ideas about emotions and morality.

The first of these is that all people share certain basic experiences and emotions. Although … post modern "strong constructionists" have sowed suspicion in our minds about this, modern social-scientific emotions researchers are beginning to reaffirm it.
The second sentimentalist affirmation, dependent on the first, is that we can become better people by hearing the stories of other people and having our own emotions (hearts) shaped by those stories.

This agenda of moral and spiritual formation shines from the full title of Samuel Richardson's 1740 prototypical sentimental novel
Pamela: "Pamela, or Virtue Rewarded—Now first published in order to cultivate the Principles of Virtue and Religion in the Minds of the Youth of Both Sexes, A Narrative which has the Foundation in Truth and Nature; and at the same time that it agreeably entertains."

Sentimental novels? Surely not!The literary sentimentalists were not hack writers; they were philosophers who expressed their deepest philosophical convictions in their writings. Under the influence of John Locke's empiricism, Smith, Richardson, Hume, and Newton all assumed that our experiences (and by extension, our emotions, and by another extension, other people's experiences and emotions) are a strong, helpful source of knowledge.

In turn, these sentimental authors and many others exerted a pervasive influence on readers and reading habits in the 18th and 19th centuries. The three most popular genres in those centuries were novels, biographies, and histories. Why? Because, thanks to Locke and the sentimentalists, everyone assumed that what you learned in reading those books was valuable, experiential knowledge that could transform you in ways mere rational argumentation could not achieve.

[Read it at: http://www.christianitytoday.com/ct/2006/107/52.0.html]

Smith regarded the sentiments between people as the binding that kept societies together. He felt they were strongest within the family, then in diminishing strength as people considered their friends, acquaintances and finally strangers, remembering that those who are strangers to us are friends and acquaintances of others.

For Smith his was not a world of hostile, selfish and suspicious persons, fighting it out daily for their sustenance and seeking always to do other people down in their endless quest for self-betterment at the expense of everybody else. Some laissez faire fanatics have not read Smith’s “Wealth of Nations” as closely as they affirm themselves to have done, to say nothing of his (ignorant) critics who have not read him, especially in his “Moral Sentiments”, at all.

That Christian authors write their novels along the lines suggested by Chris Armstrong is an interesting approach. It is an approach not confined to Christian novelists. Those with political axes to grind do so too. Charles Dickens did so in his antipathy to early industrialisation and what he considered were the unacceptable moral – and aesthetic – consequences of commerce. He shared these sentiments with Ruskin and Carlyle, the latter of whom descended into racism in his horror at John S. Mill’s sentiments towards ‘Negro’ slaves being the equal of white Europeans. Carlyle sneeringly called them ‘Niggers’ and issued his famous dismissal of Mill and his ‘dismal science’.

Presently, I am reading Anthony Trollope’s satire, ‘The Way We Live Now’, oozing with his “agenda of moral and spiritual” antipathy to the moral corruption of members of the middling and upper classes in Britain’s late 19th-century commercial society. That it is more about the mores and manners of marginalised people coaxing, lying and prostituting themselves in their quest for place and position than it is about entrepreneurs creating wealth (which meant jobs for the common poor) is not the point. It is a literary treasure, much like Thomas Love Peacock's “Crotchet Castle”, which I discussed in an earlier Blog, in its theme, though it is much better written and plotted.

Readers of Smith’s “Moral Sentiments” are treated to snatches of his views on literary themes and plots, and his acidic, but so true, characterisation of how we all have behaved and witnessd others behaving from time to time. Christians do not have a monopoly on the appreciation, or, indeed, the practice, of human sentiments. Smith's 'other work' is a magnificent essay on the unchanging human condition

Friday, February 17, 2006

Smith's Analysis of Bargaining Redundant?





Gavin Kennedy

An interesting suggestion from IT specialist, Dana Gardner, that aims to revolutionise buying and selling (he claims for everything, from 25c packets of pins to, say, a transport system). Its focus is on the buyer acquiring knowledge through IT facilities that reveal everything the buyer needs to know (and not just what the seller decides to inform the buyer).

Hence, references to the future ‘redundancy’ of Adam Smith, the Chicago School and eBay:

The vision is that anyone, anytime, just about anywhere can get all the relevant information they need when they are seeking just about anything.

A secondary aspect to the vision is that once a prospective seeker has the full knowledge and visibility into what it is they want to purchase, that they can immediately act on it — to make the bid or outright purchase, same as anyone else, no strings attached, to gain from the investment fairly and productively as soon as possible at any scale.
With due respect to Adam Smith, the Chicago School, and eBay, a lot of this vision is already in place and has been an ongoing process of market forces refinement for hundreds of years. However, it is still not comprehensive, easy, nor complete. Feedback loops only exist within closed systems. The playing field is still not level. In order to work, the realization of the vision needs to breed outside of any closed command-and-control structure. Yet it needs to be organic globally.

Again, this notion of eliminating friction in the process of market activity is ages old. But the means of attaining friction-less and enlightened commerce at low or no cost to the masses remains revolutionary. The pillars to support this vision of a monumental smear of grease on economic skids are in place, they are just not coordinated. The rub remains how
to coordinate and be organic, too, so that no one games the game


Students of negotiation should recognize the mathematical equivalent of Gardner’s vision in the John Nash “Bargaining Problem” (Eonometrica, 1955). If each party has perfect information of each other’s preferences, bargaining skills are assumed equal (eliminated), and their numerical utilities are known to each of them, then the optimal bargaining outcome would be the exchange that maximizes the product of their net gains in utility.

No bargaining process is described because it is assumed away; only the shape of the outcome is specified.

As with Nash, it does not take account of the bargainer’s uncertainty a priori of which point in the range of the acceptable solutions (exchanges) is consistent with which point in the range of the acceptable solutions of the other party. Bargainers think in ranges not price points, except for items of trivial cost. When decisions are made by teams of people(as they are in large corporations) their preferences vary in complex possible combinations.

As Gardner puts it: “The rub remains how to coordinate and be organic, too, so that no one games the game.” Precisely: Back to Smith, Chicago School and eBay!

It remains a fact that no matter how low a price buyers purchase something, they still prefer a lower price; no matter how much seller sells something, they still prefer a higher price. Perfect competition copes in theory and on the blackboard. It has not yet eliminated Smithian negotiation (‘give some of what I want and I will you some of what you want’) ("Wealth of Nations" WN I.I.2)

Automating auctions by repetitive plays does not resolve the negotiating dilemma. But not to be negative, Dana Gardner has suggested something worth looking at. A good class case?
Meanwhile ‘gaming the game’ is likely to continue.

Read Dana Gardner’s article, “E-commerce, meet your successor: knowledge commerce”:

Growing Numbers of Visitors to Lost Legacy and they are Reading more Pages when here

Recently, the number of visitor to Lost Legacy has increased considerably. This past week, for example, 9 - 16 February, there were 1,397 unique visitors (2,346 total visitors, including re-visits) who viewed 6,429 pages.

That represents close to and over 250 unique visitors a day, up from an average of between 100-150 visitors a day at the turn of the year.

Whoever you are you are most welcome!

In two weeks, 3 March, Lost Legacy reaches its first 12 months, and it will be interesting to see the annual figures from the slow start in March 2005.

Having now completed a DBA text book and web site on Strategic Negotiation for my former day-job (I retired last March) on 13 February, I can return full-time from part-time to writing my volume on Adam Smith for the 26 volume 'Great Thinkers in Economics' series for Palgrave Macmillan, due out in early 2007.

This will mean more time to reflect on serious Adam Smith studies and, of course, on the wild howlers about him and his ideas that provide daily material for Lost Legacy. I shall also be updating the Smith Bibliography with the scores of new references picked up in the past six months.

If readers have any views on how to make Lost Legacy better (including critical views) send them in to me at gk AT ebs.hw.ac.uk, or post them here.

In the meantime, thank you to all readers, regular and occasional.

Thursday, February 16, 2006

Revising Adam Smith and Laissez Faire

Earlier this month I noted an article by James Pyland and I reported it under the heading: “Trenchant Rebuttal of Laissez Faire Activists” (scroll down the Blog to read it).

I was struck by Pyland’s article and its main theme, namely that corporate activists attribute to Adam Smith views on laissez faire which he never held, and, because they link it to their misreading of Smithian ‘self-interest’, which they transmute into selfishness, they claim Smith’s authority for modern corporations to be absolutely free of any government interference, as their predecessors claimed for mine, mill and factory owners in the 19th century. Much government interference today is malign and plain wrong, but it would be wrong to erect a principle to make all interference illegal.

I also made clear that I had various quibbles with James Pyland’s presentation and the content of his arguments, but I avowed a disinclination to make these explicit in case they gave comfort to the laissez-faire activists he calls to account.

Today, in one of my regular visits to the Division of Labour Blog, there is a less than fair criticism of James Pyland’s article by Professor Robert Lawson, a regular contributor, with whom I often agree. I find it a disappointing put-down of Pyland’s article from a distinguished economist because it uses arguments unrelated to the general soundness of the author’s criticisms of laissez faire doctrines and their forced association of them with Adam Smith.

Pyland quotes extensively from Smith’s “Wealth of Nations”, attacks him for being a ‘Marxist’, which is something I had not noticed because I took the article at face value and, while I am a long way from being a Marxist, I do not think it relevant in the matter of questioning the misleading use of Smith’s legacy.

Here is Robert Lawson’s rebuttal of Pyland in full (read it http://www.divisionoflabour.com/):

"Revising Dr. Smith
--Robert Lawson
Here's yet another attempt by a Marxist to co-opt Adam Smith.

To refute the laissez-faire capitalism often ascribed to Adam Smith, it is only necessary to quote . . . Adam Smith

This should have read "To refute the laissez-faire capitalism often ascribed to Adam Smith, it is only necessary to selectively quote . . . Adam Smith"

It would be nearly impossible to quantify the number of times that pro-corporate, laissez-faire activists have used the phrase “invisible hand” to justify all manner of unjust and brutal economic policies and their outcomes.

Ok let's get this straight once and for all: laissez-faire activitists are PRO-FREEDOM not pro-corporate. (Apologies for the scream.) Corporations (which in Smith's day, unlike today, were all government granted monopolies) are very often against laissez-faire. I defy you to find me a bona fide laissez-faire activitst defending ADM's ethanol subsidy or the car quotas on Japanese cars or local tax abatements....

I was going to go on dissecting the article, but just can't put myself (or you dear reader) through the misery."

The unusual step of my quoting from another Blog in full is that is the only way that busy readers can judge its merits without visiting Division of Labour (a Blog I recommend because Division of Labour is an excellent source for commentary by economists).

Laissez-faire activists may be ‘pro-freedom’, but where that involves freedom for people Smith called ‘merchants and manufacturers’ to do what ever they will under cover of ‘freedom’, no matter what monopolistic, duopolistic, anti-competitive contrivances and anti-social short-termist behaviours they get up to (and remember Adam Smith considered that sort of behaviour to be a norm, not an exception) then such laissez-faire activists become apologists for corporate misdemeanours.

The 18th century chartered corporations were indeed operating under the legal sanction of Royal monopolies, but Professor Lawson is slipping a fast-one in suggesting that the history of modern corporations has been one of unsullied good behaviours just because they are private corporations. Smith had plenty to say about the inclinations and behaviours of private ‘merchants and manufacturers’, and recent headline accounts of some recent corporate dishonesty in the US suggest these inclinations and behaviours, regrettably, are still with us.

The challenge to “find me a bona fide laissez-faire activist defending ADM's ethanol subsidy or the car quotas on Japanese cars or local tax abatements....” is disingenuous in the extreme. Of course, laissez-faire activists, such as Professor Lawson, are completely consistent and honest in their inclinations and dealings, but it is not Professor Lawson who is under scrutiny here.

The charges are against the myths of the laissez-faire activists who traduce Adam Smith’s legacy - and his life-long disinclination to advocate laissez faire (he never used the words). I am grateful for Professor Lawson for his consideration and his kind desire not to put his readers “through the misery” of his dissection of Pyland’s article, but this reader for one (always willing to learn) would be pleased to read such a dissection, complete with an entirely different set of quotations or references from any or all Smith’s works he finds that exposes my ignorance in these matters.

‘Grand statues will not overcome destructive statutes.’

Ivor Tiefenbrun writes in The Scotsman (16 February), in its regular ‘Column that Puts Business First’, under the heading, ‘Prophet of capitalism deserves to be honoured in his native land’. I am sure Adam Smith would have preferred he wrote his piece for a ‘Column That Puts Consumers First’!

Ivor Tiefenbrun writes a trenchant piece blasting governments for their regulatory red-tape interference in business and their marked obsessions with imposing on businesses collectivist solutions to social problems. Ivor Tiefenbrun, the founder and owner of Linn Products Ltd, is a successful and celebrated entrepreneur in Scotland’s manufacturing sector, specialising in electronic entertainment systems. He knows what he talks about on business.

Tiefenbrun is also enthusiastically supportive of the project, sponsored by the Adam Smith Institute, to have a 20ft statue of Adam Smith erected in Edinburgh’s High Street, opposite where Smith worked as a Commissioner of Customs and a few hundred yards up the High Street from where Smith lived until he died in 1790. The Statue is to be erected by public subscription and I trust that Mr Tiefenbrun puts his money where his mouth is and has sent his donation to ASI to help to make the project successful (I shall look for his name on the plinth when it is erected – as he may look for mine).

However welcome are Tiefenbrun’s sentiments for Smith, I have a caveat. I shall excuse the heading of Smith being a ‘Prophet of Capitalism’ on the likely grounds that it was written by a worldly-wise and weary sub-editor, who has seen it all and forgotten nothing. Prophets and cartoons are in the news at present and generally they are people believed by the gullible to be divinely inspired to foretell the future.

Smith did not qualify as being a Divine (he abandoned an ecclesiastical career in 1746 to become a teacher, not a preacher) and he most certainly did not predict the future. He wrote about 18th-century Britain, did not foresee ‘capitalism’, which manifested itself in the 19th century and for which the word itself was first put into use as late as 1854, and he did not write from the point of view of producers:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile, trhe interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end of object of all industry and commerce.” (WN IV.viii.49: page 660).

He was not hostile to business, provided it behaved itself by trying to monopolise markets and increase prices to consumers. He believed that well-managed competitive enterprises ran by free owners (within the law) benefited consumers. He had no doubts that free commerce provided a better deal for consumers.

I emphatically agree with Ivor Tiefenbrun when he writes:

The views of Adam Smith, in particular the idea that wealth can be both created and destroyed, is till not widely understood or accepted. Weslth can only be created by the imagination and labour of free men and women. It is destroyed by excessive government taxation on regulation and, in particular, by wealth redistribution and constraints on legitimate personal or business freedom.”

I liked the particularly apposite ending in Ivor Tiefenbrun’s article:

Grand statues will not overcome destructive statutes.’

[PS to all: ASI is still looking for donations for Smith’s statue in minimum units of GBP5,000, at http://www.adamsmith.org]

Wednesday, February 15, 2006

Invisible Hand, no 31

What do they teach at the University of Virginia that an obviously bright and articulate student, like Zack Fields, writes with such passionate certainty and anger that he trounces the views of Jack Bogle, a visiting former CEO who warns of the ‘impending crisis of capitalism’ and exclaims that "values should be embedded in business"?

Mr Bogle, Zack Fields reports, “then cited Adam Smith's belief in the importance of ‘propriety,’ ‘generosity’ and ‘love of that which is noble’ with respect to business behaviour”.

But far from Zack Fields finding common ground with Mr Bogle, a critic of ‘capitalism’ predicting a ‘pending crisis’, he launches into a tirade against anything with which ‘capitalism’ is, or has been, associated.

These are all laudatory sentiments, but they also contradict the ideology of the invisible hand, which says that selfish action will ultimately maximize societal welfare. Bogle is absolutely right -- it would be wonderful to trust our corporations. It would also be idiotic.”

I am bound to ask politely: what is this ‘ideology of the invisible hand’? Maybe somebody’s presentation at the University of Virginia of the ‘ideology of the invisible hand’ includes the silly (even ‘idiotic’) notion “that selfish action will ultimately maximize societal welfare”, but such nonsense never had anything to do with Adam Smith or anything he wrote, and if it is taught in Virginia (surely not?) the tutors have got it (irresponsibly) all wrong.

The tone of Zack’s rendering of his repetition of ‘selfish action will ultimately maximize societal welfare’ owes more to his tutors’ debt to Bernard Mandeville’sFable of the Bees: or Private Vices, Public Benefits’ (1705, 1714, 1729) than it does to Adam Smith. Indeed, as early as 1759, Smith, in his ‘Theory of Moral Sentiments’, severely criticises Mandeville for purveying such views on selfishness in his ‘Theory of Moral Sentiments’ and he demolishes any concession to Mandeville’s (or anybody else’s) view that selfishness does any good for society, or even could do so.

There is no succour for any tutor to argue that in “Wealth of Nations” altered these views of Smith. He taught moral sentiments and political economy together to the same students at Glasgow and such a glaring contradiction would have been commented upon by them (for they were every bit as bright and articulate as Zack, but alas much poorer: see Smith's Lectures oo Jurisprudence, 1763-4).

Zack continues with this theme, however:

More fundamentally, because each person lives in the short term, each capitalist participant will engage in what Bogle called "counterproductive" short term behaviour. If we do not live forever and we are maximizing our own utility in line with invisible hand ideology, there is no reason to maintain trust through the end. At some point it is profitable to cheat one's neighbour

which leads Zack to his piece de resistance:

A self-proclaimed believer in "free enterprise," Bogle does not realize that the mechanics of market competition cause the income inequality, exorbitant CEO pay, and corruption of accounting agencies that he views as a mutation of the virtuous marketplace. Moreover, the ideology of the "free" market serves as a convenient rationalization of our inhuman treatment of one another in daily market exchanges.”

Markets do not create income inequality – these existed for long before markets appeared and before the revival of commerce a thousand years after the fall of the Roman Empire. ‘Exorbitant’ distribution of incomes to the rich and powerful were not noticeably absent in feudal society and what preceded it. These societies suffered the ever present fragility of what passed for justice and the associated tyrannies that were experienced by the majority of humans, many considered worse than expendable, for generations.

Criminality is vulnerable to the laws of justice. The fact that Zack knows so much about ‘corruption of accounting agencies’ and ‘our inhuman treatment of one another’ is because freedom, liberty and justice make these things known to all. In many parts of the world, the ‘vile rulers of mankind’ control the media and hide their crimes.

And be sure, ‘daily market exchanges’ do not cause ‘inhuman treatment’. They enable millions to access most of the things they need, including the poor, every day of their lives in countries like the USA, Europe, and the West’. Of course, everybody could be ‘better off’ and many should be, but without the ‘daily market exchanges’, denigrated by Zack Field, the lot of the very poorest really would be dire, with no hope of reprieve.

The very poorest in the West are a long way from the dreadful poverty of Africa, parts of Asia (including Russia and parts of the Middle East) and Central and South America, as are the articulate students of the University of Virginia.

Humans do not create poverty; it is the absence of wealth creation that is the bed-rock of poverty. Defective as all human societies are and have been, no alternative system of wealth creation has achieved as much as even the most defective of market economies, while the best of the market economies (based on liberty, security and justice) do even more, right across the income distribution. Where would you rather be poor: in Charlottesville, Virginia, USA, or any town or village in Africa?

[Read the article in The Cavalier Daily, “Rationalising the Market” by Zack Field, University of Virginia, Charlottesville, USA:

Adam Smith and Gordon Brown: quintessential bourgeois or quintessential Scots?

Gordon Brown MP stands near the touchline warming up his muscles and tendons, anxiously ready to go onto the field of politics in place of player-manager Prime Minister Blair, who has signalled to the front bench that he is ready, reluctantly, to come off – soon, or later if possible.

The fans of both teams watch and scrutinize everything Brown does for signals about when he will be allowed to run onto the field, whether he will play as an attacking forward in pursuit of a radical agenda, a mid-fielder who manages the play of the game, or as a defender to keep out the reinvigorated other side’s team led by its new younger captain, who threatens to make serious dents in Labour narrow lead, somewhat compromised of late by a few spectacular ‘own goals’.

Hence, today’s (15 February) Daily Telegraph’s Opinion Column (known as the ‘Torygraph’ in Private Eye), advises David Cameron, the new Tory leader, to see “Brown for the Scottish bourgeois he is”.

The mistake we could all easily make is to imagine that Mr Brown's morality is socialism; that a Brown government will be an Old Labour one. This is to misread both the circumstances and the man.

Quite simply, the facts will prohibit socialism: the national finances will not admit more taxes and more spending. The Government's fiscal plans show spending increases falling to less than two per cent from 2008, down from 5.5 per cent in 2004: after the fat years when spending growth exceeded income growth, the ratio is about to be reversed, and lean years are ahead.

That aside, the idea of Mr Brown as a socialist misunderstands his whole career. The driving project of his youth was his biography of James Maxton, published after nearly 20 years' work in 1986. Maxton was the Red Clydesider who led the breakaway Independent Labour Party out of Ramsay MacDonald's Labour Party, in disgust at their "collaboration" with the 1931 National Government.

The lesson Mr Brown draws from Maxton is: don't do it. Rather than a revolutionary socialist, Mr Brown is, like Adam Smith, his fellow son of Kirkcaldy, a quintessential bourgeois. And like Smith, he knows that economics are less important than culture.

Most of all, and quite unlike Mr Blair, he has a healthy respect for Victorian values. He recognises them for what they were: the agents of classlessness, aids to self-improvement and levelling-up.”

This is not the first reference to the fact that Gordon Brown comes from Kirkcaldy, birth place of Adam Smith sometime before 5 June 1723. Nor that Brown’s reputation for ‘prudence’ and ‘frugality’ is allegedly shared by both men. Alan Greenspan also drew attention to ‘something in the air’ about Kirkcaldy as it produced both Smith and Brown to stride the world’s stage (though for Smith it was more evident after he died in 1790 than during his life, and often, as we point out regularly on Lost legacy’, for reasons not associated with anything he wrote or advocated).

As for Brown being a ‘quintessential bourgeois’, I am unsure what the Telegraph means by this label. He has never struck me as being that way inclined or in his behaviour, at least from memories of him as a (brilliant) student who graduated PhD from the University of Edinburgh, and from observations of him in the media over the years since then. I would also have trouble fitting Smith into that label from what I know about him from his writings – a prudent and frugal professional academic is about the most I can say about him, more interested in ideas than in fripperies.

Yes, on reflection they do share certain characteristics, though I think it is more the careful sense of balanced steadiness that we would expect from two talented, well educated Scots, brought up in the ‘quintessential’ Scottish Protestant tradition, and neither of them given to extremes of fanaticism in their remedies for society’s many problems.

And yes, Brown, like Smith with his use of the language of religion, knows how to speak in the socialist language at the roots of his party without quite letting on how little of it he expects to see flower.

Tuesday, February 14, 2006

Invisible Hand no 30

When I read the two sentences of Steve Lydenberg’s piece in GNet my heart beat a little faster, momentarily. It seemed OK, and then it turned to dust:

One of the great challenges of our times is how to encourage corporations to act in the public interest. A powerful obstacle is the myth of Adam Smith's "invisible hand" which suggests that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.”

Steve was not announcing a break with the myths about Adam Smith and the invisible hand, of which I have spoken many times on this Blog. Oh, no! He was arguing against the myth of the invisible hand as if Adam Smith was its source. He was not!

It is a lie perpetrated by modern, mainly neo-classical economists (some innocent, many not) and some of their 19th century forebears, and is now a parody of the original isolated metaphor (from Shakespeare: Macbeth 3:2), and is now firmly ensconced, drinking double brandies and smoking Havana cigars in campus academe, polluting the minds of students from Economic 101 onwards. I think I now understand how generations of religious believers can believe the most absurd propositions, even to the point of killing those less credulous who ask questions.

First of all Smith never asserted that “that if everyone -- corporations along with investors and consumers -- act solely in their own short-term self-interest, a greater good will inevitably be served.” He suggested something much milder: people acting in self-interest to better their condition (an urge that I with us from the cradle to the grave) they could, given certain other factors, produce a ‘greater good’ for society, but (and it is a big but) they could also work against the public interest. Greedy monopolists, scheming merchants and manufacturers, private interests and ‘vile rulers’, could work against the public interest by their nefarious practices.

It was never automatic. If it was, then Smith would have no complaint about mercantile policies imposed by governments, urged on by the winners with influence at the expense of the losers without influence, because benign self interest would triumph over malign self interest. But that was never the message of “Wealth of Nations”, which is why he never gave the invisible hand metaphor free reign in his book, and nor did he advocate a policy of laissez faire (he never mentioned the words).

The way it is taught, one would believe without checking the source for oneself (and most do not – even professors of economics teaching invisible hands and laissez faire in Smith’s name have never read Smith’s “Wealth of Nations”, except isolated quotations), that his works were replete with examples of the invisible hand and praise for laissez faire. If they read what they preach they would soon discover a scarcity, where they have taught abundance, of references to these alleged ideas of Smith. Strange, to say the least.

The ignorant peasantry of Europe in the dark ages after the fall of Rome had an excuse for accepting all they were told by articulate priests, who preached from the Bible in Latin, a dead language they did not comprehend, until it was translated into their own tongues. With comprehension came dissidence. But “Wealth of Nations” and “Moral Sentiments” are in English and are translated into all main languages. What excuse do campus tutors have for perpetrating the nonsense they espouse?

But to get back to Steve Lydenberg’s piece. He is right. The problem, I agree, is the “powerful obstacle [of] the myth of Adam Smith's "invisible hand". But not quite as he believes it to be. It is not Adam Smith’s myth of the invisible hand that is the problem, but myths about Adam Smith and the invisible hand that is the problem. When Wall Street bankers and CEO’s of commercial enterprises, assorted academics who should know better, understand this truth they can adopt policies more in keeping of how markets work.

Steven D. Lydenberg is Chief Investment Officer of Domini Social Investments. As the founder of KLD Research & Analytics, he was instrumental in the creation of the Domini Social Index, the first SRI index, launched in 1990. He has written widely on issues of corporate social responsibility, including his most recent book, Corporations and the Public Interest (Berrett-Koehler, 2005).

His article is at: http://www.gnet.org/news/Print.cfm?NewsID=30281

What Steve Lydenberg should do now is read “Wealth of Nations” by Adam Smith to straighten him out on some fundamentals of Smithian economics.

Smith on Family Life and Family Discord

In National Review (14 February) David F. Forte offers an essay: “The Founders @ Home: the framers’ ideas of marriage and family”, where he refers to Adam Smith and his statement in the first sentence of “Moral Sentiments”:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it” (TMS I..i.I.1, page 10).

David Forte missed a great opportunity in confining his quotation to a general statement about mutual sympathy, because Smith wrote about the mutual affections within families in his book that circulated widely in the American colonies and was read sympathetically by some of the framers. David Forte could have quoted from “Moral Sentiments” the following:

With what pleasure do we look upon a family, through whole of which reign mutual love and esteem, where the parents and children are companions for one another, without any other difference that what is made by respectful affection on the one side, and kind indulgence on the other; where freedom and fondness, mutual raillery and mutual kindness, show that no opposition of interest divides the brothers, nor any rivalship of favour sets the sisters at variance, and where every thing presents us with the idea of peace cheerfulness, harmony, and contentment? On the contrary, how uneasy are we made when we go into a house in which the jarring contention sets one half of those who dwell in it against the other; where amidst affected smoothness and complaisance, suspicious looks and sudden starts of passion betray the mutual jealousies which burn within, and which are every moment ready to burst out through the restraints which the presence of the company imposes? (TMS I.ii.4.2, pages 39-40).

Or from Smith’s more extensive essay on the family (TMS VI.ii.1.1, pages 219-24) where he averts that disaffection between close family relatives is the ‘highest impropriety, and sometimes even a sort of impiety’.

Smith's own family circumstances show a sickly child born, not long after his father died, in 1723, brought up by his widowed mother, who never re-married but devoted her life to her son's well-being, seeing him well educated and settled. She was a model doting-mother and a practising Christian of the Protestant sect. Smith reciprocated with his deep love and consideration (even at variance to his philosophical principles in the matter of religion, from which alleged 'athiesm' he kept her ignorant, evem minding carefully his public writings) and she shared his household until she died in 1783.

So did his mother's neice, Janet Douglas, his cousin, who was his housekeepr from 1754 to 1788, of whom he always displayed the warmest of family affections. Extant letters show him teasing his cousin in company at tea. When he wrote about family discord his reaction was in the contrast with his own family and its 'mutual love and esteem.'

Monday, February 13, 2006

Free speech is good for economic progress

The current furore over cartoons depicting the founder of the Muslim religion is an apposite reminder of the time when Scotland and England were dominated by several fairly rabid versions of the Christian religion, which treated detractors with no less intense hostility and physical reprisals. It is also a useful background to my, I hope, friendly and civilised discussions with Professor James K. Galbraith on the influence of the Scottish version of Christianity on the writing style of Adam Smith’s discourses.

Gary Duncan writes an excellent piece in today’s Times (London) on the theme that ‘Free speech ensures economic progress’. His ‘hook’ into his readable article is via an incident in Edinburgh’s history in 1696 in the ‘affair of one Thomas Aikenhead, an 18-year old theology student.’

On a freezing Edinburgh night in the autumn of that year, Aikenhead and three acquaintances found themselves hurrying up the Scottish capital’s Royal Mile as they sought refuge from the biting cold. As they passed the city’s austere Tron Church, an embodiment of the country’s repressive Presbyterian church, the young man turned to his fellows and joked: “I wish right now I were in the place Ezra called hell, to warm myself there.”
The casual remark would turn out to be no laughing matter. The next day, Aikenhead’s comments were reported to the authorities of the Scottish church, the Kirk. They didn’t see the funny side.

A swift inquisition of other students revealed a litany of ridicule of the faith by Aikenhead. He had claimed that the Bible was a work of invention by the prophet Ezra; that Christ’s miracles were cheap magic tricks; and that the Apostles were “silly, witless fishermen”.
The incensed ministers of the Kirk quickly made the affair a cause célèbre. Scotland’s chief prosecutor, the Lord Advocate, began a prosecution under a law that those who “railed and cursed against God” or the Trinity were to be punished by death.

A repentant and shattered Aikenhead was convicted and condemned. Desperate appeals by distinguished supporters to the Scottish Privy Council, and to King William in London, failed as the Kirk demanded that an example be made. On January 8 of the following year, Aikenhead was put to death.”

[You should read the entire article in the Times (London) at:

This is a cause célèbre among Scottish sceptics of the social benefits of religion (any religion) on economic change. It is certainly to the fore in the minds of those interested in the politico-religious climate of the Scotland during the 18th-century Enlightenment and its effects on leading contributors to it, such as David Hume, Francis Hutcheson, James Hutton and Adam Smith.

Of these men, David Hume lived most dangerously, developing a measured but teasing disdain for the apparatus of Christianity (miracles, the existence of God, belief in the after-life, etc.,), but also exhibiting careful prudence in not driving the most rabid of the ‘divines’ (of which Scotland had more than its fair share) into the violent conduct of the stony-faced men without a sense of human decency who dominated the Church in 1696. Their successors proved strong enough to keep David Hume out of professorships in both Edinburgh and Glasgow, but not strong enough to arrange to hang him like they contrived to hang poor Aikenhead.

Francis Hutcheson shrugged off silly charges of apostasy to the embarrassment of his accusers. Both Hutton and Smith escaped the attention of the vigilantes by disguising their scepticism in their books in carefully composed camouflage of ‘well-known phrases’ that appeared to show their soundness as Christians. Unless the ‘witch-hunters’ looked very closely to the disposition of their word orders they would not realise the game being played on them.

Nevertheless, the vigilantes were powerful enough still to make life difficult for targets of their enmity. Gradually, over the 18th century, the urge for freedom of expression – the very heart of enlightenment – grew bolder. Smith made several public gestures towards freedom of expression, notably after his religious mother, whom he worshipped, had died in 1783, but he still did not feel completely free of the ever-present threat. When David Hume was dying in 1776, Smith tried desperately to avoid a commitment to publish David Hume’s Dialogues. The correspondence between them shows Smith twisting and turning to commit Hume to agree to not publish his short book, because of the embarrassment this might cause Smith on the eve of “Wealth of Nations” – it not being a good time to attract public condemnation from ignorant and superstitious ranters.

Hume almost broke with his closest friend over this issue, addressing him as ‘my dear Sir’ in place of ‘my dearest friend’ (Correspondence of Adam Smith, Liberty Press, 1985). Hume being Hume, he reverted to his forgiving and friendly salutations in his last letters to Smith. It was his characteristic of deep gentility and manifest kindness to all (including his critics) that made Hume popular even with orthodox members of the Church and which protected him to the extent that largely he was left alone by his would-be tormentors in his latter days. When the Dialogues were published by Hume's nephew they caused less of a stir than Smith's one- page eulogy to Hume.

In acknowledging the personal struggles of leading Enlightenment figures to make public their radical ideas about fundamental aspects of the society of which they were part and part wanted to change, we can reflect on the hidden, because silent, wise prudence of the many Muslims who do not share the certainties of the fanatical fundamentalists. This might suggest caution in blanket condemnations of all Muslims because of the actions of a (large) minority of those in the streets outside embassies.

Given our own record of religious intolerance, albeit from two hundred years ago, we should reflect sympathetically on the difficulties faced by those Muslims who are inclined to favour Enlightenment in the 21st century, as we are reverential of those Enlightenment figures who risked social place in the 18th century.