Thursday, November 30, 2006

Silent Traffic is Still Traffic - but how about a bit of noise!

Many of the top Economics’ Blogs have very active comment pages from their readers, mostly chatting sense reasonably close to the Blog’s posts. The top Blogs, at least in economics, are located in the US, mainly in academe, and while many are the students of the faculty providing the Blogs, at least at the beginning of term, or semester, the majority over the year are fellow professional economists, with a fair sprinkling of non-economists (judging by their contributions).

I refer to Blogs, among those I read every day, by Greg Mankiw (how does he pronounce his name – talking about him the other week, I was pulled up for saying ‘mankev’ as in ‘Kevin’; my puller-up said it was pronounced ‘mankew’ as in Kew Gardens); Brad Delong, Frank Stephenson and Craig Depken of Division of Labour; Truck and Barter; Mark Thoma at Economists’s View; Russell Roberts and Don Boudreaux at Café Hayek; Organisations and Markets; William J. Poley; Peter Boettek at Austrian economists; Canadian Economists; Worthwhile Canadian Initiative; and two sites that list, as they happen, whatever is posted on economics blogs around the world, namely, Economics Roundtable and blognetbiz/econ. In Europe we have Tim Worstall (Portugal) and Stumbling and Mumbling, and, of course, the ever popular Adam Smith Institute blog. Among these, are the ‘big guns’ of the economics profession.

In this world, Lost Legacy is a small player. Its focus is on Adam Smith and his work, and not on whatever catches the attention of economists generally, means that it ploughs a narrow furrow, though not an uncontroversial one on occasion, and it appeals to specialist scholars in the history of economics thought, and those economists who think deeply about the source of ideas (and policies).

There appears from these data to be a steady and regular readership, some few of whom write to me privately( some extracts or themes from them I take up here); a very, very small number take the time to post in the comments section, which sometimes worries me – am I writing for myself?).

However, there has been a steady upwards trend too in visits to the Lost legacy site. This past week Lost Legacy has scored its best results so far since it started in March 2005.

So, therefore, many readers find Lost Legacy interesting and useful and silently enjoy what they read each day. If this volume of traffic stokes up and maintains interest in the authentic Adam Smith, then all well and good, and if it clears up misinformation about his work, it is even better.

I have data for traffic through Lost legacy showing that for seven days to 29 November and 4,773 visits were made (including people who visited Lost Legacy more than once per day) and a total of 2,691 ‘unique visitors’ (only counting a first visit).

On Wednesdaty 29th, for example, there was 422 ‘unique’ visitors, who viewed on that day 1,597 ‘pages’. The total of pages viewed for the week was 11,052, the largest number of page views since we started.

Now if we get more of you to post a comment, that would be another record…

Wednesday, November 29, 2006

A Process by Any Other Name is Mumbo Jumbo

Two short posts caught my attention this morning; the second one comments on the first. The game, then, is to spot the subtle, unintentional, drift in language:

The first is from: Worthwhile Canadian Initiative:
“Intelligent Design as applied to economics takes pretty much the same form as it does with biology: "What we observe couldn't have just happened; it's obviously the work of some Greater Power." When it comes to evolution, the Greater Power generally takes the form of an omnipotent deity. The counterpart in economics is the 'economic elite': the existence of inequality is interpreted as evidence that those who have done well did so by design.

Economists do of course try to explain that market outcomes are the result of decentralised interactions between self-interested agents - and that these interactions generally lead to socially desirable outcomes.”

The Worthwhile Canadian Initiative Blog is sub-headed (“who would have thought an economics blog could be this exciting?”) and for once its claim is truly accurate of its content (i.e., worth book marking)

The second is from REG Monitor (‘a Roubini Global Economics Service’) and its heading is: “Intelligent design vs. the invisible hand”

“The analogy even bears some straining: Economics and evolution are both driven by an "invisible hand" of decentralized interactions between selfish agents, and both sciences are susceptible to interpretations that fall prey to the naturalistic fallacy: If it happens in the market, then it is good. If it happens in nature, then it is good. Neither inference holds, of course, and so we remain free to make normative statements about how best to regulate markets or how to lead a moral life.”

From: REG Monitor (a Roubini Global Economics Service)
“Intelligent design vs. the invisible hand” by Stefan Geens (28 Nov 2006)

The slip from “decentralised interactions between self-interested agents - and that these interactions generally lead to socially desirable outcomes” to the ubiquitous ‘invisible hand’ was inevitable, given the grip on economics of the metaphor today.

Actually, ‘Intelligent Design’ and ‘the Invisible hand’ fit together very well and both are equally fallacious. They both rely on a Deity (who designed the Deity?) somehow working in the background to explain what science explains more convincingly. Why economists feel obliged to rest their scientific explanations for the evolution of markets on pre-science explanations from pagan superstition is a worthy subject for speculation.

The Blog posts above are concerned with economists being confronted by non-economists, who are disrespectful of some of the certainties espoused by economists – the “yawning gap between economists' understanding of economic issues and that of non-economists – and what might be done about it by economists.

In my humble view, not much will be done to lower these barriers while scientific knowledge about how people in economies work is presented in the form of ‘miracles’, ‘invisible hands’ and related mumbo jumbo.

Tuesday, November 28, 2006

A European President Speaks Mostly Good Sense (with caveats)

José Manuel Barroso, President of the European Commission, speaks on the theme of "The Scottish enlightenment and the challenges for Europe in the 21st century; climate change and energy”, in the ‘Enlightenment Lecture Series’, at Edinburgh University, 28 November.

“It is no accident that I have so far omitted that famous son of Kirkcaldy: Adam Smith.

Smith was not just a man of his time. In his broad fields of expertise, and eclectic range of interests – moral philosophy, sociology, logic, economics, ethics, jurisprudence – he also resembles Renaissance man. In his continuing relevance today, and his belief that international trade can reduce frictions and promote peace, he is very much a modern European man as well.

This is someone who put consumers above special interests. Someone who saw open and fair competition as a good thing. Someone who recognised that in an open market, it isn't just the person who sells a good who benefits; the person who buys it benefits as well.

He also reserved some acid words for university professors, which in present company are probably best left unsaid. But his most significant observation, for me at least, is that open markets can be vehicles for social good.
In Book IV of The Wealth of Nations, he observed that by removing artificial barriers, and allowing the emergence of a 'simple system of natural liberty': 'the sovereign is completely discharged from a duty...for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards employments most suitable to the interest of society.'

Today, Europe must use the power of market forces for the interests of society to tackle one of the biggest issues facing all Europeans, indeed all the world - climate change.

Adam Smith is much misunderstood both by what I would call ‘state fundamentalists’ and by ‘market fundamentalists’. Yes, he said: ‘There is no art which one government sooner learns of another than that of draining money from the pockets of the people’. But he also said: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities’.

The fact is, Smith recognised that administrations are necessary - to administer justice, to make sure sensible rules are followed, and to create and maintain public works and institutions of great value to society.

In much the same way, Europe today needs strong institutions like the European Commission and the European Court of Justice in order to maintain the Single Market; to administer the Emissions Trading Scheme; to secure affordable and sustainable energy for future generations; and much more.”

Well, at least President José Manuel Barroso, from Portugal, got Smith almost completely right.

I am less sure that he was right about associating the European Union with Smith’s sentiments about markets and the maintenance of the European Commission. The latter’s record in trade is not good, especially agricultural protectionism that is directed at the poorer countries of the world. Worse, it is either glossed over, as President Barroso does in his ‘Enlightenment Lecture’, or smugly justified by omission, as he also manages.

Trade protectionism is more important, in my view than what Barrosa claims is the biggest issue ‘facing all Europeans, indeed all the world’, which he announces is ‘climate change.’ There is some (much?) doubt about the proposed remedies for what is believed to be human generated ‘climate change’, but there is absolutely no doubt about the role of human generated international protectionism, in both the EU and the US, and the local nationalist protectionism among those worst affected.

However, I give Jose Manuel Barroso full marks, and heartfelt thanks, for not linking ‘an invisible hand’ to his comments from Book IV of Wealth of Nations and for his qualified observation that Smith’s ‘most significant observation’ for him was ‘that open markets can be vehicles for social good.’ What a change! If only others would qualify Smith's assertions likewise, as Smith intended, namely that self-interest may or may not lead to social benefits instead of tending, as they invariably do, assert self-interest to be almost compulsively benign, when his Book IV is a long critique of self-interested monopolists and protectionists, to which we can add polluters, making society worse off than it needed to be from their nefarious activities.

Monday, November 27, 2006

Chicago Hoisted on its Own Petard

Mark Thoma in Economist’s View at:, asks: “Was Adam Smith Wrong About the Invisible Hand?”

Economics: The Invisible Hand of the Market, [a review] by Peter Steinfels, NY Times: Duncan K. Foley [has a] ... new book... [F]or his survey of more than 200 years of economic thought, ... he chose the title “Adam’s Fallacy: A Guide to Economic Theology.”
Adam? Theology? The Adam in question is ... the founding father of modern economics, Adam Smith.

So what is “Adam’s Fallacy”? ... It is the idea that the economic sphere of life constitutes a separate realm “in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome,” Professor Foley wrote, a realm unlike all the rest of social life, “in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”

To which Mark Thoma comments:

The attacks on economics get tiresome. The main thesis is that Adam Smith's invisible hand doesn't work, that the pursuit of self-interest is not guided by an invisible hand to the best societal outcome. There aren't enough details given about why the author believes this to fully evaluate the reasoning behind the assertion, but some of the reasoning is discussed.

The author says:
“These are discussions, above all, of faith and belief, not of fact, and hence theological”
Why does this disqualify economics as a science? Theories aren't facts. Theories can be falsified by the evidence, but no amount of experimental work can ever confirm they are true. All science is, in this sense, based upon "faith and belief, not of fact, and hence theological."

It’s not just that Foley is wrong (I found his views on Adam Smith wrong on several counts), but that Mark Thoma is also wrong in his defence, not of Adam Smith, but of the Chicago version of Adam Smith, somewhat at variance with the scholar from Kirkcaldy.

If Duncan Foley’s criticism of Smith’s so-called folly is about Smith’s alleged assertions about the metaphor of ‘an invisible hand’, then both Foley is wrong (Smith did not have a ‘theory’ of markets involving ‘an invisible hand’, or if he did he never made this clear in anything he wrote, so we don’t know about it) and Mark Thoma is wrong to associate Smith with the testable assertion that markets were ‘guided’, ‘managed’ or ‘operate’ under the influence of an invisible hand.

Scan down Lost legacy Blog this last week to see my take on Smith’s metaphor for a case against the dominant belief in the market’s ‘invisible hand’, which Chicago theory falls at the first hurdle of finding such a theory in Wealth of Nations (or Moral Sentiments, or his ‘History of Astronomy’ essay).

If it wasn’t Smith’s theory, then testing such the Chicago theory might be interesting but it would have nothing to do with Adam Smith.

As for Mark Foley’s own folly in creating a book aimed at undergraduates and general readers based on false notions about one of the protagonists that he features, the best we can say is that it is based on a false prospectus.



Posting en route to Edinburgh from France last night, I messed up Sunday's message, due to a tenuous wireless connection via a French hotel.

I am back now and once I am settled in (I am about to go out in a moment) I shall re-commence posting via broadband (something missing in France from my taking the 'wrong' laptop).

Sorry if there was any confusion.

Sunday, November 26, 2006

Miracles No, Markets Yes

An economist Steven Landburg wrote in "Armchair Economics" about the invisible hand: "It is something of a miracle that individual selfish decisions lead to a collectively efficient outcomes."

And the following are from one article using ‘Thanksgiving’ as a hook to pause in ‘wonder’, ‘surprise’ and ‘admiration’ of markets in action. Harmless? That depends on the conclusions drawn from pausing in awe during poetic moods about natural phenomena.

The article declaims: ‘the miracle of the invisible hand’ and asks: ‘If that isn't a miracle, what should we call it?’ Consider for a moment if the subject was not a metaphor, but a rainbow following a shower of rain, with the inevitable fairy story of the ‘pot of gold’ waiting at the end of it.

Poetry, literary licence, childish wonder, all three? Is it worthy of economics as a science that knowledge about how markets work is presented in the same manner as ‘pots of gold’ and the creation of rainbows by invisible supernatural gods?

In the question of how markets work, Adam Smith (and many others before and since) made contributions that are, and ought to be, well understood today. Yet the adjective ‘miraculous’ is bandied about as if such notions add anything to understanding. By association, too, it adds to confusions best avoided.

Consider the following:

“Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure"


"It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes."

From Mark J. Perry’s Blog for Economics and Finance, Carpe Diem (23 November) and his article: Thankful for the invisible hand’

Such talk leads to notions of praying for social and economic development. Does it not follow that when markets are regarded (worshipped?) as ‘miracles’ our belief in them ceases to involve people who operate within them or, in parts of the world, substantially without them, and moves to the higher mysteries of invisible gods – a ‘hand’ without a ‘body’ cannot exist – and their favours.

Like the notion of original sin, those without the benefits of the indulgences of the gods are in a self-determined vulnerability to the absence of these benefits, either because of their own ‘sins’ or those of their antecedents. Thus, those communities from which the benefits of markets are absent have only themselves to blame – the poor are poor because they are deficient in some missing qualities that others have.

Even excluding such notions from the thinking of those believing in the ‘miracle’ of the market, one question is always the elephant in the room: why, if markets work by ‘miracles’, why is it that the ‘miraculous’ does not happen to occur by proclamation in those, large parts of the world, often with large populations of people no different in capacity for any others elsewhere?

Markets are not started by ‘miracles’, they don’t need ‘miracles’ to keep going, and they don’t happen by proclamations about ‘miracles’. Smith wrote extensively about markets in the commercial age, about their history and their genesis in the propensity to truck, barter, and exchange, and the division of labour based on the realisation of benefits of exchanging surplus output, and he analysed how prices signal to participants their best immediate actions, all of which appear disconnected from the actions of others, but which are in fact interconnected anonymously to the actions of untold myriad others.

Markets grow slowly and inexorably over long periods, gradually widening and deepening their influence, as they draw in new and old participants in ever more complex layers of interconnections that reveal new and revised opportunities for new exchange relationships, and the termination of old relationships, enhanced by the growth of knowledge and technologies.

Two other matters need correction. One is the absurd notion that it is selfishness that drives people’s actions in markets, reaching its worst rendition in the Greko speak of ‘greed is good’. Whatever the alleged merits of the Holywood scriptwriter’s view it most certainly was not Adam Smith’s; in fact the ‘culprit’ was Bernard Mandeville, described Smith a ‘licentious’ philosophy. It is not selfishness, but mediated self-interest or ‘self-love’. To conclude transactions the parties must take account of the interests of the other party in addition to their own. Two selfish egoists would seldom, if ever, conclude their bargains. No matter what may bargainers believe, they serve the interests of others, not themselves alone.

The other is the unfounded assertion that by acting for their own self-interests they necessarily, automatically, or even consequentially, serve the interests of society as a whole. That would indeed be a ‘miracle’! Self-interests do not always serve society’s interests, even broadly considered, but certainly not narrowly considered. Monopolists, polluters and protectionists all act in their self-interests and self-love, and cannot be said to serve society’s interest. Those notions smack of an apologia for corporate, and personal, responsibility for anything they decide to do (a failing I associate with the Chicago school).

Friday, November 24, 2006

Probable Sources for Smith's Use of the Metaphor of 'an invisible hand'

While at the Adam Smith conference at Columbia University, New York, in October, I had the pleasure of meeting and conversing with Professor Pierre Force, a professor of French and an authority on 18th century literature. He is author of ‘Self-Interest before Adam Smith: a genealogy of economic science’, 2003, Cambridge University Press, which I read recently, and it is a tour de force, if I may say so in this context.

One of its many topics that particularly interested me was a discussion of references to an invisible hand in literature from classical Roman times to the 18th century (pp71-75). Readers will know that I regularly mention Shakespeare’s ‘Macbeth’ (3:2) and Daniel Defoe’s ‘Moll Flanders’ as sources for Smith’s inspiration to adopt the metaphor that others had used before him.

Pierre Force lists several other sources, some of which we may assume Smith knew of in copies of the relevant source books he had in his library and one or two of the authors he met.

The list begins with Horace’s Odes (quoted by Smith in his lectures on ‘Rhetoric and Belles Lettres’, p 225) as: ‘The mighty hand of thundering Jove’, of which god Smith mentions in this context in his History of Astronomy.

The invisible hand metaphor was used in Christian literature as the ‘invisible hand of God’. Augustine said that “God’s hand is his power, which moves visible things by invisible means” (The City of God, xii, 24).

Daniel Defoe in Colonel Jack (1723, p 213) says “it has all been brought to pass by an invisible hand”, plus a reference to an invisible hand in Moll Flanders (1722).

Nicolas Lenglet Dufesnoy said that an “invisible hand” has power over “what happens under our eyes” (“L’Histoire justifiee contres les romans”, 1735).

Charles Rollin, whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them” (Histoire ancienne des Egyptiens, des carthaginois, des Assryiens, des Babyloniens, des Grecs, Paris 1821).

Jean-Baptiste Robinet (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand” (“De La nature”, 1766; in Smith’s library).

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand” (“Contemplation de la nature”, 1764: in Smith’s library).

Pierre Force notes that “in the rhetorical tradition, the economy of something is the relationship between the whole and the parts”, an idea pregnant with insight into Smith’s use of ‘an invisible hand’ metaphor in his Work.

Thursday, November 23, 2006

His 'Greatest Legacy' - Surely Not!

As if on cue, given this week’s rather long postings on the so-called ‘invisible hand’, yesterday I was reading a book I purchased last year but which I forget to take back to Edinburgh when I returned there in September. It was raining heavily and I didn’t feel up to writing material for my forthcoming book on Smith and, anyway, my former day job colleagues asked me to look over a proposed contract they were putting together and my mind was not centred enough on the contents of Wealth of Nations to justify my attention.

The book in question is by Peter Minowitz and is called: “Profits, Priests, and Princes: Adam Smith’s emancipation of economics from politics and religion”, 1993, Stanford University Press, Stanford, CA. In my view, Dr Minowitz has written an excellent and scholarly study of Adam Smith’s writings, particularly in his chapters on Smith’s approach to supernatural religion and the ‘after life’. I found nothing in these chapters to undermine anything I wrote in this week’s posting on Smith’s status as a non-believer in revealed religion; in fact, I found much of the book to support what I had written.

This morning, wanting something to read over breakfast (my Internet was down again and I could not print off my regular newspaper columns) I picked up Dr Minowitz’s book and turned to Chapter 6: ‘The Invisible Hand’ which I did not look at while writing my three-part short essay on Smith’s use of the metaphor of ‘an invisible hand’ in response to a correspondent’s questions. Well that I didn’t!

In contrast to Chapters 7, 8, 9 and 10, which I read with great pleasure yesterday evening, Chapter 6 is so contrary to my thinking on Smith’s use of the metaphor ‘an invisible hand’ that I cannot think why Dr Minowitz could have arrived at his interpretation of it. He is so wonderfully correct and measured in his close arguments in Chapters 7-10 and so wrong in Chapter 6 that it ‘ruined’ my morning. I wrote, and re-wrote, only 330 words on Book IV of Wealth of Nations, when I normally would write or ‘tidy-up’ 1,000 before lunch. Even lunch in our nearby town with my wife and a neighbour was a strain, with me trying hard to focus on our social conversation.

Chapter 6 begins: ‘The concept of the invisible hand was perhaps Adam Smith’s greatest legacy’. It goes downhill from then on, though it brightens up at the end of the chapter, as if Dr Minowitz wrote the beginning to conform with conventional interpretations of his use of the metaphor, which he only partly corrects after his ritual genuflections to orthodoxy (his writing on supernatural gods and Smith’s beliefs show no such holding back to avoid upsetting conventional attributions to him of the biblical certainties).

Dr Minowitz notes, correctly, that Smith uses the metaphor sparingly – only three times – and makes a little joke about his use being ‘almost invisible’. ‘On a practical level,’ he writes, ‘the invisible hand represents the liberation of individual self-interest and a concomitant restraining of the political impulse to supervise society as a whole.’ If only it did, though, of course, like in Alice and Wonderland, you can make any metaphor to mean exactly what you want it to mean.

I discussed in this week’s essay the meaning of Smith’s use of ‘an invisible hand’ in Moral Sentiments. Needless to say, this is not Dr Minowitz’s interpretation. I suggest that the division of the land under property relations could not but increase the productivity of agriculture if population were to grow above the level of the ‘rude’ hunter gatherer mode. The property owner could indulge in selfish consumption – palaces compared to hovels – but only if the growing population of serfs and retainers achieved at least the level of consumption achieved in the hunter-gatherer mode, otherwise they would experience high mortality rates and population would decline, not grow. This is an inescapable fact of subsistence below a tolerable minimum. It did not require ‘an invisible hand’ to bring it about. Nowhere was the land divided equally; if it had been, the production and property regime would have been unstable. Property was the essential component, and with property comes accumulation and, with output above subsistence, including the individual extravagance of property owners (up to limits), serfs and retainers would produce the output (serfs) and the security (the armed retainers), sufficient for the propagation of the species.

When Dr Minowitz turns to Smith’s metaphor in Wealth of Nations he runs several of Smith’s ideas together and misses the trivial nature of what Smith used the metaphor for. He asserts that: ‘The invisible hand is invoked to bolster Smith’s argument for free trade, especially free international trade.’ (p 129) He achieves this claim by noting that Book IV is a critique of Mercantile policies of trade restrictions and prohibitions adds that: ‘The immediate point Smith illustrates by means of the invisible hand is that people engaged in foreign trade promote society’s interest merely by pursuing their own “advantage” (p 129).

But hang on, Smith’s metaphor, as quoted by Dr Minowitz, is in Chapter 2 (of nine chapters in Book IV), which is about ‘Restraints upon the Importation from Foreign Countries of such goods as can be produced at home’ and is not about directly promoting foreign trade. At best it is about the irrelevance of restricting foreign imports (as Dr Manowitz notices). Smith suggests that because merchants prefer domestic trade, as ‘near home’ as possible to their trading in foreign imports for domestic consumption (on grounds or risk and security), and the carrying trade, they inevitably support domestic industry, and they ‘necessarily endeavour so to direct that industry, so that its produce may be of the greatest possible value’ (Book IV, Chapter II). It is these actions that promote the national interest – sell and buy domestically – and, in consequence, increase domestic annual product or revenue (GDP) by the most that suits the domestic country’s capital and labour.

That is what is called by Smith’s metaphor, ‘an invisible hand’. Nothing more, nothing less, but which Dr Manowitz asserts is ‘Adam Smith’s greatest legacy’! Surely not. If Smith’s ‘greatest legacy’ (‘greatest’ compared to everything else he wrote?) is only the arithmetical consequence of aggregating all the merchants and manufacturers maximising their individual annual outputs or revenues to produce the maximum annual output or revenue, then we can safely assert that this was the easiest intellectual legacy ever earned by anybody in the history of knowledge. That Smith’s legacy was much, much more, needs no proof.

The necessary laws of arithmetic – the arithmetical whole is the arithmetical sum of the arithmetical parts – is too trivial to be a legacy, except for the inventor of arithmetic. Hence, the source of my distractions for a few hours today. That the use of a metaphor, like ‘an invisible hand’, is perfectly legitimate, and that identification of the motivations that drive individuals to take certain courses is also perfectly legitimate, but the invention of something claimed, or implied, to be a mysterious career-making discovery when it is nothing more than the application of the basics laws of arithmetic is something right out of order, though widely believed across the profession of economics, which is a comment of its present state.

Tuesday, November 21, 2006

Invisible Hands and Moral Sentiments

If Smith’s use of an invisible hand is a trivial metaphor in Wealth of Nations, what about his use of it in TMS?

As I am temporally separated from my library, my Moral Sentiments was published in 1869 and is not the Liberty Fund edition which I normally use. Interestingly, this copy was awarded as ‘Queen’s Prize’ to a Frederick W. Gooch by the ‘Science and Art Department’ of the ‘Committee of Council of Education’ for his science classes in May 1872 by the ‘Lords of the Committee of Privy Council on Education (MDCCCLXI). Quite a mouthful! I also had to uncut all pages in it, showing that Mr Gooch never read any part of his prize!

The reference to ‘an invisible hand’ appears in ‘Part fourth: of the effect of utility upon the sentiment of approbation’, Chapter 1: Of the Beauty which the Appearance of Utility bestows upon all the Productions of Art, and the extensive Influence of this Species of Beauty’. You should be able to trace the relevant chapter with this archaic reference in a modern copy.
Smith establishes that utility is a principal source of beauty, in the form of a ‘coveniency’, or some kind of fitness for purpose, but more than that, whatever the item is, if it looks good to the eye, it has beauty, and he quotes either Francis Hutcheson or David Hume to the effect that the utility of an object suggests the pleasure or conveniency for which it is ‘fitted’ (designed?) to promote. And this feature motivates persons without these objects to strive to acquire them by commencing the process by which they better themselves (a theme taken up in Wealth of Nations), and, interestingly, that some people, in the extreme, lay out money, even at the risk of ruin, to acquire ‘trinkets of frivolous utility’. Conduct is influenced by this principle – the lust for objects, and not ‘an invisible hand’ – and it is ‘often the secret motive of the most serious and important pursuits of both private and public life.’
He gives an extended, brilliant, and oft-quoted example, of the ‘poor man’s son, whom heaven in its anger has visited with ambition.’ From it he generalises that it is well that nature imposes upon us this deception in this manner, because that principle – imagining how we can be better off by changing our circumstances, not an invisible hand – first prompted humans to cultivate the ground, build decent and magnificent houses, found cities and large societies, invent and improve through science and the arts (manufactures) to ennoble and embellish human life, and spread the modern (18th century) civilisation across the globe.
His argument shifts now to separate these motivations from a concern for humanity towards mankind and from the baser kind, summarised as a survey of his possessions, and he declares and demonstrates firmly that motives of humanity are absent predominantly compared to our baser motives. Now it is at this juncture that he introduces his sole use of the metaphor of ‘an invisible hand’ by the ‘proud and unfeeling landlord’. As with his use of the same metaphor in Wealth of Nations, his use of it in Moral Sentiments had nothing to do with markets, or theories of markets, or supernatural religion. It was entirely about the unintentional consequences of human motivations, even of those involving bad conduct.
The landlord lives off his rents, but cannot consume much more food than one of his tenants because their stomach sizes, presumably within a range of anorexic to obese, are similar. He can have his food in his palace prepared more delicately, served more politely, and his table dressed more ostentatiously than poor men eating in their hovels. But, says Smith, his ostentatious living is supplied by those who prepare the products that he consumes, fit his dwelling with furniture and equipage, and provide him with his ‘luxury and caprice’, and these suppliers acquire payment in return for so doing, but not from his ‘humanity or his justice’. This has the consequence that the unfeeling landlord in his vanities ‘nearly’ maintains the number of inhabitants which his ‘soil’ is capable of maintaining.
Smith goes further. He asserts that the rich, despite their ‘natural selfishness and rapacity’, though they consume little more than the poor, and though they intend only their ‘own conveniency’, and though their sole end from employing the labours of the ‘thousands they employ’ directly and indirectly is vanity, etc., they necessarily divide with the poor the produce of their improvements.
The rich, says Smith, are ‘led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants; and thus without intending it, without knowing it, advance the interests of society, and afford means to the multiplication of the species.’
With the discovery of property after the ‘rude society’ of hunters (and gatherers), the eventual resultant increase in food production, through shepherding and farming, rose sufficiently to enable population to grow. There could have been no lasting increase in population without property because there would have been no basis for sustaining rising populations from the output of ‘rude society’. With property and all that followed, population rose above the levels achieved in rude society and above that which would have been sustainable if the land had been divided equally. The ‘richer’ property owners unintentionally maintained a larger population.
Smith is close to saying that many forms of economic organisation, and various forms of political control that might be considered to be less than palatable (however defined), could have ‘incidental beneficial effects’, as some put it, and I think this is probably true, though he did not spell it out specifically. If property owners were part of a ‘providence’ that divined the division of the earth, whatever that means, he asserts that providence ‘neither forgot nor abandoned those who seem to have been left out in the partition’, because they too ‘enjoy their shares of all that it produces’. This may be comforting, but hardly historical.
If a population lives on a total food output of X and doubles in number, it must consume a total food output of 2X to maintain the same reproduction rate. Any replacement mode of production from rude to landed property must maintain its food production, and thereby its consumption per head, commensurate with levels reached before. If it does better than that, there is room for property owners to raise their consumption per head of whatever they can exchange for their surplus food, and, if Smith’s assertion is to remain true, for non-property owners to raise their per capita consumption too, or to be at least as well off as before. The greater is food production after changes in modes pf production, the higher the reproduction and survival rates of people and the more sustainable is population growth.
The fact that the discovery of modes of production based on property (from shepherding, farming to commerce) have increased productivity through each mode, it is perfectly possible for a population of propertyless persons to subsist sufficiently well to reproduce itself, and to grow slowly, provided they can access shares in output from exchange relationships with the property owners. This is not a result of ‘an invisible hand’; it is a necessary outcome of the division of annual product among claimants of shares on it, above or close to subsistence, based on the propensity to exchange and the division of labour.
Again, the metaphor of ‘an invisible hand’ guiding this outcome is quite redundant and expresses nothing more than laws of arithmetic, including addition and compound interest.
Smith asserted that we are part of the process that brings these outcomes about. We are ‘charmed’ with the ‘beauty’ of society’s ‘arrangements’ which are ‘fitted to promote it’ and they ‘confound’ our imagination ‘with the order, the regular and harmonious movement of the system, the machine or economy’, so to speak, as ‘something grand, and beautiful, and noble’, well worth ‘all the toil and anxiety’ we ‘bestow upon it.’
It is after this, that Smith asserts that the ‘same principle, the same love of system, the same regard to the beauty of order, or art and contrivance’ frequently serves to recommend these institutions which tend to promote the public welfare.’ He develops this theme in praise of ‘public-spirited’ people who encourage ‘improvements’ to whatever exists that hinders ‘public welfare’ – he mentions in this context road repairs, struggling manufactures like linen and woollen goods – and notes crucially that their motives may not be based on ‘sympathy’ and ‘fellow feeling’ for ‘waggoners and carriers’, nor for ‘weavers’ nor their customers. ‘The perfection of police [provision of goods, not crime prevention in its 18th-century meaning], the extension of trade and manufacturers are noble and magnificent objects’, no less for Smith.
Such public spirited activities ‘make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them.’ Such so’ beautiful and grand a system’ makes us ‘uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions.’ These sentiments summarise, I believe, Smith’s self-perceived role as a ‘public spirited’ contributor in his works to the improvement of the British social system of which he studied and wrote in great detail.
All governments are valued only in proportion, he asserts, as they ‘promote the happiness of those who live under them.’ Sometimes we ‘value the means more than the end’ of promoting the ‘happiness of our fellow creatures’. Some men are driven by ‘public spirit’ but who are not ‘very sensible’ to ‘feelings of humanity’ and there are others of the ‘greatest humanity’ who are devoid of ‘public spirit’. He argues for approaching the persuasion of those ‘dead to ambition’ by addressing their admiration in how the palaces and conveniences, etc., of the rich function and are designed, though they do no more than what a hovel does; and to persuade someone wanting in public virtue, you should attend to how the ‘great system of public police’ works to evoke a sense of ‘public spirit’. This last reminds me of Bastiat’s powerful example of the feeding of Paris each morning through its market economy and without a single person directing the thousands employed in doing just that. What more persuasive an illustration is there of Smith’s assertions above to inspire any reader to support in a spirit of public service the continuation of market systems to do their work?
He concludes by asserting that ‘political disquisitions’ are useful (‘even the weakest and worst of them’) if they ‘animate the public passions of men, and rouse them to seek out the means of promoting the happiness of society.’ This last, sharply contrasts with pronouncements associated with the Chicago school, who consider concerns with public welfare as nothing to do with the purposes of the people directing a modern corporation, which they confine exclusively to that of maximising shareholder value, and nothing else.
Smith would not have agreed, and he certainly would not have limited his concerns to leaving the happiness of mankind to a non-existent ‘invisible hand’ or to the wayward self-interests of monopolists, polluters and protectionists.

© Gavin Kennedy 2006

Monday, November 20, 2006

Part Two: ‘An invisible hand’

The so-called invisible hand is a metaphor for the laws of arithmetic: the whole is the sum of the parts of which it consists. From this realisation (certainly obvious to Smith who was competent in mathematics, as noted by his tutors) the door opened in the next century to what was to become neoclassical economics, an approach steeped in mathematics, initially calculus (the maths of rates of change) and, later, the advanced maths familiar to every graduate student today.

Smith had this to say about the utility of mathematics, compared to its beauty and higher rational thinking:

‘It is in the abstruser sciences, particularly in he higher parts of mathematics, that the greatest and most admired exertions of human reason have been displayed. But the utility of those sciences, either to the individual or to the public, is not very obvious, and to prove it, requires a discussion which I not very easily comprehended. It was not, therefore the utility which first recommended them to the public admiration. This quality was but little insisted upon, till it became necessary to make some reply to the reproaches of those, who, having themselves no taste for such sublime discoveries, endeavour to depreciate them as useless’ (TMS IV.ii.7)

It is not that competence in mathematics deserves no respect; simply put, it is whether an exclusive consideration of concepts in mathematics (general equilibrium) that was found wanting at the end of the 19th century, really has any utility for understanding economic systems in the context of human societies in the 21st century. Answer the questions: what creates wealth and what inhibits its creation and is the answer in an equation that assumes away the social context?

Milton Friedman died this week and among the many tributes I noted a passage that struck me as thoughtful, succinct and relevant to these points:
“Friedman was providing his answer to these great issues. What was that answer? Here was the second key to his influence. His model was remarkably simple. Not only did he write with ease and clarity. The model of the way the world works was also clear to him. It was an extension of Adam Smith's invisible hand. To almost every social problem, Friedman cleverly and often brilliantly provided the invisible hand as its solution. Market forces, through competition, would distribute goods and services at the appropriate price as long as people acted in their self interest. Thus, workers would get the wages they deserved, business the profits, and growth would be maximized, creating the optimal number of new jobs given resource and technological constraints. Schooling could be subjected to this ideal solution, as could healthcare and even racial prejudice in the labor markets. The setting of currency values could be subjected to this as well” (Jeff Madrick, “Milton Friedman: a man not for all seasons”, The Huffington Post, 17 November, 2006).
Note the qualification: ‘at the appropriate price as long as people acted in their self interest.’ It exposes the weak link between the popular, near universal, association of Smith’s ‘invisible hand’ with the neoclassical certainties, as exemplified by Milton Friedman and the Chicago school.
Smith expressed his thinking by metaphor because he preferred literary perspicuity to the risk of losing his readers’ attention if he expressed it in mathematics, though he was competent in both. His audience was educated but not necessarily numerate.
His point was that unintentional motivations of individuals cumulatively account for annual total output, or its equivalent in annual revenue, represented by a metaphor, ‘an invisible hand’, in place of stating the obvious to numerate readers who understood the laws of arithmetic (a whole is the sum of its parts). Acting according to ‘their self interest’ may, and often does, compromise the potential for optimum total output.
The marginal ‘revolution’ (Walras, Edgeworth, in the 1870s) with its overriding assumptions of partial and general equilibrium, led to the excision of ‘imprecise’ literary expressions from political economy. New generations of economists, more numerate than literate, came of age with Samuelson (1940s), and were almost totally mathematical by the end of the 20th century, happily working with assumptions that mattered less than predictions, but not having any more success from researching their imaginary reality in predicting the future than they had with explaining the past.
This was their decisive break with Smith’s approach in Wealth of Nations, which was his report on the history of the creation of wealth; his books was left gathering dust on their shelves. They replaced it with purely mathematical models that studied rates of change of variables under the strictly limited assumptions of individual self-interest, maximisation under constraints, and rewards to factors. The implausibility of idealised behaviours of abstract agents, representing the humans missing from the models, was smoothed over with the brilliant device of anointing the models and their assumptions with the authority of Adam Smith’s implied blessing of ‘his’ invisible hand.
That it wasn’t ‘his’ invisible hand, but Shakespeare’s Macbeth, or Defoe’s Moll Flanders, and that he never meant his borrowing of it to be more than a mere metaphor for inescapable arithmetic of 2 + 2 = 4, is somehow lost in continuing atrocities of attribution of mystical (even religious or spiritual!) meanings to his innocent use of a metaphor for arithmetical aggregation.
I sometimes feel it is an almost hopeless struggle to remind those who forget, or don’t know, what his use of ‘an invisible hand’ means, which I come across daily and which readers of Lost legacy will be familiar with from the small selection of them that I comment upon here from the scores that I could.
Why do neoclassical, Chicago influenced, economists need Smith’s metaphor? No term for it appears in their equations, not even a ‘dummy’. It isn’t in their processes, with not even a note about it being a ‘residual’ – which is not surprising when there isn’t room for real people with their mixed motives. Their absence has no effect on the outcome (by definition), yet we know people are real, but somehow the presence of benign invisible hands, which we know do not exist, is regarded with all the reverence once accorded by ignorant pagans to invisible gods, which Smith wrote about in his ‘Principles which lead and direct Philosophical Enquiries, illustrated by the History of Astronomy’ (c. 1744-?).
But before we conclude, as many do, that somehow a non-existent metaphor has significance because Adam Smith used it, we should step back a little and note why he probably confined himself to one, and only one, use of the metaphor of ‘an invisible hand’ in Wealth of Nations, which must be surprising to those neoclassical economists who believe he had a ‘theory’ of ‘the’ (it’s always ‘the’) invisible hand of markets. Realising that he didn’t have such a theory is a small step, perhaps, but his metaphorical description of an arithmetical law of ‘one small step’ being the start of a ‘long journey’ is akin to blessing this old Chinese proverb with ‘an invisible hand’ guiding the traveller, because a ‘long journey’ is the summation of many small steps!
Why did Smith not generalise across all economic activity his use of a literary metaphor, like ‘an invisible hand’? His non use of ‘an invisible hand’ to account for the individual contributions of many merchants adding to, or reducing, the annual revenue from capital and labour is a most glaring absence. He had many opportunities in Wealth of Nations to do so. The fact is he didn’t, which belies the significance bestowed upon it by the authority of Milton Friedman or Paul Samuelson, though it was missed by Walras and Edgeworth, and the others in between.
I have not the space here, but I highlight the many instances in my forthcoming Adam Smith for Palgrave where he could have said something, even in the negative, if he considered ‘an invisible hand’ an appropriate metaphorical device or anything stronger, such as a ‘theory’. The fact is he didn’t.
Book IV that contains his critique, described, not unfairly, as a polemic, directed at mercantile political economy. Now, place a theory of self-interest, the centre-piece of neoclassical economics, into the motivations of the people driving these mercantile policies, which Smith criticises. Monopolists seek monopolies to limit or extinguish competition, polluters pollute in pursuit of their self-interest and disregard costs they impose on others, and protectionists tax or prohibit imports to raise their profits above what they otherwise would be. These activities, among others, lower the actual as opposed to the potential for economic growth and the welfare of those affected.
Each person involved in these wealth distorting activities is not acting all that differently from the merchant who prefers to invest his capital domestically rather than out of his sight and personal supervision, which are necessary features of distant trade, especially abroad. Self-interest dominates both sets of behaviours and their outcomes. Yet wealth distortion activities (monopoly, pollution and protection) benefit the individual distorter’s wealth but not necessarily the national wealth (Smith was agnostic on this point), while the competitive merchant operating locally and using his capital to employ successive rounds of labour to add value to raw materials, adds to national wealth by the laws of arithmetic (a.k.a: ‘an invisible hand’).
Whether an economy of distorters as a whole adds more to the aggregate wealth of society than an economy consisting of insecure local traders, in principle, is measurable. Smith believes that a non-mercantile economy would grow faster because regulating or proscribing into which activities capital and labour could flow, inhibits growth because costs rise above what open domestic competition and lower prices would generate, supplemented by lower cost imports. But the self interests of people prone to preferring monopoly protections are generated from the same cautious instincts that lead merchants to prefer the home to foreign trade ventures, namely security. Each is concerned about the ruin that follows from investing scarce capital in a venture where there are risks of ruin by the actions of others (competition that lowers prices of merchants with higher cost causing bankruptcy; piracy and fraud that absconds with scarce capital, etc.). These risks were compounded in the mid-18th century by the laws of bankruptcy that claimed the entire wealth of an individual to pay off debts arising from any source or for any reason.
Self-interest as the motivator for all actions of economic agents is a two-edged sword. It does not necessarily result in benign aggregate outcomes for society. It can lead to growth and opulence or stifle growth, create pollution, personal ill-health and environmental damage, prolong higher costs of consumption goods, hold up innovation and prolong unemployment. We know this because history is replete with numerous examples.
Smithian Liberty has not yet existed anywhere; the default state of perfect liberty has always been partial, differing in degree to the extent to which it is constrained by, among others, the ‘vile rulers of mankind’ through to gullible legislators. Tyranny by governments, or by landlords, merchants and manufacturers, and, in our days, oligarchs of capital and labour, communism, or religious mysticism, is more normal (in the sense of prevalent) than secular democracies and open societies that suffer none of these features of the default state.
Some neoclassical economists ignore the social, institutional and behavioural context entirely, oblivious that many of the developing economies to which they apply their models are so far removed from the conditions they assume, in order to make their equations determinate on paper, that they might as well not bother, for all the good that spending scores of millions of public money on projects that assume their assumptions hold. If property is near absolutely insecure, as it is, for example, in many parts of Africa, then postulating economies at micro- or macro-levels with behaviours as if property was secure is wasteful, where it is not a cruel deception.
However, if all the conditions of Perfect Liberty, including justice, were absolutely necessary before any economic growth could materialise, a smaller world population would still be running around as hunters and gatherers (and their lives were hardly all ‘sweetness and light’ in camps amidst Nature’s plenty). The issue is which of the possible arrangements of society – perfection or versions of the default option – is likely to promote general or partial opulence sooner, rather than later?
One thing is certain. Relying on a metaphor is not part of the solution, and Smith never said or implied that it was.

Saturday, November 18, 2006

Adam Smith's Invisible Hand: simple literary metaphor or deep theory? (Part One)

A correspondent asks me why I am hostile to the common attribution of ‘the invisible hand’ to Adam Smith as a ‘theory’, to which I replied as below (I shall add some other comments later as Part Two):

Book IV of Wealth of Nations contains Smith’s critique of mercantile political economy. To understand the metaphorical role of ‘an invisible hand’ in its proper context in Smith’s Work it is essential to follow his application of his growth model to a particular set of problems that dominated (and in many senses, still dominates today’s) public policy, namely that of international trade.

Chapter II is headed: ‘Of restraints upon the importation from Foreign Countries of such Goods as can be produced at home.’ It is not about a theory of markets (covered in Book II).

Import duties and prohibitions are part of the policy of securing monopolies for domestic producers. He gives examples in live cattle, salt provisions, woollen goods, silk, linen and many other unnamed goods coming under outright prohibitions. The result is that various species of industry enjoy a greater share of labour and capital than in the absence of tariffs and prohibitions they would obtain, but whether this adds to or lowers a country’s wealth is open to empirical testing.

Smith states an earlier proposition that industry cannot exceed what society’s capital can employ, and therefore, no regulation of commerce can exceed this barrier at any one moment; regulations only divert the amount of capital and labour distributed across industry in the absence of such regulations, i.e., how capital and labour would be allocated if left to its own accord. Combine this technical constraint with the assertion that each individual exerts himself to find the most advantageous outlet for his capital and labour for ‘his own advantage and not that of society’, he establishes why this can result in the most advantageous distribution of capital and labour for society.

His first assertion is that individuals endeavour to employ their capital as near home as they can, which consequently benefits domestic industry (in the sense that capital accumulation and the employment of local labour are local).

Smith’s growth model is fairly simple: ‘stock’, initially the form of a ‘grub stake’, evolved to maintain the hunter between kills, some times lasting a few days; the basic features of saving from today’s kill (inclusive of gathering) to maintain the hunter’s productivity until the next kill, remains right through to shepherding/farming, and latterly commerce (his Four Ages of mankind in LJ). Out of frugality, the primitive accumulation of capital commences, driven by the ‘propensity to exchange’ and the ‘division of labour’. That is not a perfect relationship because with each production round – capital and labour combined to produce an output – there are leakages from the output in the form of above necessary consumption (prodigality) above a subsistence minimum, losses from disastrous investments or futile hunts, robbery and fraud, wars and ostentatious frivolities, as well as capital moved abroad.

The reproduction cycle consists of the separation of products into immediate consumption (inclusive of longer lasting items like consumer clothes, shelter, and furniture, etc.) and productive investment to replace used up capital, plus net increases to employ additional capital and labour. Where the former is ‘too high’, net investment will be negligible, and may barely maintain the capital base; where the latter is optimal, net growth of the economy will proceed fastest, and progress towards opulence will be quickest.

The wholesale merchant prefers the home trade to the foreign trade for consumption (imports) and both to the carrying trade on ‘security’ grounds – capital stock necessarily is small and losses not easily absorbed (ruin is only one or two disasters away). Smith makes the point that capital circulates back to the home trade quicker than foreign trade. The merchant knows the people he deals with better than foreigners (including people in distant parts of the same country) and he trusts or avoids those he knows best. He is also familiar with his country’s laws and how to go about redress, in contrast to dealing with traders in foreign countries, where the law may be less certain and the magistrates biased against foreigners.

These circumstances dictate higher returns for greater risks and great prospects of ‘trouble’ in foreign trade. For equal profits or slightly less, a merchant still prefers the home trade (and local business). Capital in the home trade necessarily puts into motion a greater quantity of domestic industry, putting into employment a greater quantity of local labour and a greater revenue than the same capital engaged in distant sales and purchases (because they employ foreign labour, which spend in their locality). This causes individuals to employ their capital in a manner that supports domestic industry and gives employment and revenue to a greater number of local people.

This is a summary of the logic of Smith’s assertions. It is a natural outcome of his growth model (local net revenue after replacing capital used in the production cycle, paying the wages of labour and paying profits and rents to the merchants and landlords).

At the merchant level, each individual necessarily endeavours to direct his industry so as to produce the greatest possible value (he would be ‘perfectly crazy’ to do otherwise). This manifests itself in the added value supplied by labour to raw produce. Profits are the marker from adding the greatest value, and merchants have an identifiable quantity to measure their success or likely success in their ventures, or failures.

At the macro-level the annual revenue (GDP) of society is the sum of the exchangeable value of the total produce of industry, it follows therefore that with every individual merchant attempting to maximise their profits also necessarily maximises the annual revenue of society, the aggregate being the sum of its individual parts.

Now, this is a case where the public interest coincides at the aggregate level with the personal endeavours of those individuals endeavouring to maximise their own gains. For this to be affected, it does not require that the individuals recognise, or intend, the aggregation of their endeavours to be maximised on behalf of society. In this case, ‘as in many others’, the aggregated outcome follows from the sum of the disaggregated parts, provided they are motivated in the manner suggested by Smith.

The twin motivations of preferring domestic to foreign industry (security) and applying scarce capital and employing labour so as to maximise profits (personal gain), they cannot help but maximise national output and annual revenue. The rhetorical metaphor for this process (the whole is the sum of its parts) is that it is ‘led by an invisible hand’!

Nothing magical, nothing mystical, and nothing particularly Smithian. Add water by the teaspoonful to a tank at any moment it is the sum of the individual teaspoonfuls. What physicist would require a metaphor to describe this outcome, especially by calling it ‘an invisible hand’?

Moreover, it does not require a statesman, lawgiver or planner to tell individual merchants how to go about their business of maximising their profits. They are incentivised to do so by the penalty-threatened judgements of the proper, secure, and profitable use of their scarce capitals and the employment of available labour. They know that to make what they can buy cheaper from elsewhere (including abroad) reduces the available capital for productive investment in the business of transforming capital into added values that rewards them with profits after meeting their costs. If it doesn’t, they withdraw from one business and enter others (under Perfect Liberty).

I might comment that if prices shift, consumers (not all of them) often shift their consumption patterns and in aggregate the revenue of the sellers’ rises or falls (led by ‘an invisible hand’ or the predictable consequence of aggregation of flows?). Likewise, when taxing a commodity to raise revenue or discourage consumption, or both. Micro changes have macro consequences. Big deal!

This is a summation of Smith’s analysis of the first part of Chapter II of Book IV.

(Part 2, Monday)

Friday, November 17, 2006

Was Adam Smith a Believer?

I had intended to discuss a claim that Adam Smith was religious and show why I believe he wasn’t. Unfortunately, I did not save the article properly and I am unable to retrieve it because of fragile French Internet connections. However, I offer a short piece meanwhile.

Among those who claim Smith was a believer is the highly respected Jerry Evensky, whose recent book on Adam Smith is excellent, except for his portrayal of a religious core in Smith’s thinking.

The Acton Institute author attempts to show Smith’s religious thinking and my response is ‘provisional’, in the sense that a detailed rebuttal requires I have the paper with me and can access my library. What follows are general remarks from a single reading of his paper.

The case for crediting Smith with a religious core in Moral Sentiments and Wealth of Nations rests on his numerous references to God, the author Nature, and the purposes of humankind (self-preservation and propagation of the species). The religious case is by no means flimsy, nor completely without substance. Its proponents are not stretching a few isolated details in a selected parade of quotations to make a tenuous case. Far from it; Evensky and Denis, etc., two respected Smithian scholars, cannot be accused of unfamiliarity with Smith’s oeuvre.

They are simply misled by what they believe to have read, as were the ‘four bishops’ who purchased ‘Moral Sentiments’, believing it was written by a Christian scholar, much to the friendly amusement of David Hume. Other readers search his ‘Wealth of Nations’ for confirmation that his prescriptions are consistent with belief in God.

What is missing is a complete absence of context, as if the 18th century was as protective of free speech as today’s modern secular democracies. To forget context is to assume he published within an environment free of institutional and social interference, when it only protected a permissible singular viewpoint. It wasn’t ‘free’, even for ideas mildly critical of the ruling religious dogma of Christianity. Excommunication from the Church was a real threat to those tempted to risk purveying ideas considered to be ‘dangerous’ to the conventional core beliefs of dominant religious practice.

The last hanging for apostasy occurred in Edinburgh in 1697; the victim was a young theological student, his offence some careless remarks; his sentence to discourage others. Adam Smith as born in 1723; the last ‘witch’ was burned in Scotland in 1727. The enthusiasm for religious-inspired barbarism was only just waning within the living memories of those around him. His loving widowed mother, a devout and practising Christian, contrasted with aspects of his induction as a studious school and college boy (1731-46), and with the institutionalised rigours of Christian belief and practice. This became evident in his uninterrupted six years of absence from his mother’s home during his time at Oxford. He went to Oxford on a 9-year Snell Exhibition, the main purpose of which was to comply to finish his university education with ordination as a Minister in the Episcopalian Church in Scotland.

He did not fulfil his ‘solemn promise’. He suffered some kind of ‘depressive illness’ in 1744-6 and returned home on leave from Balliol College, never to return. Three years later he resigned, received his MA degree, and embarked on an academic career.

What was the nature of his ‘depression’? We don’t know for certain. I surmise that it had something to do with his crisis of faith. For indirect evidence we can read an early composition from those years, particularly the beginning third of it on the ‘Principles which lead and direct Philosophical Enquiries’ (known today misleadingly by its short-title, ‘History of Astronomy’).

In pleading the case for the philosophical method, he criticises human credulity in matters of Nature and its phenomena, particularly when under the influence of ‘pagan superstition’ that attributed nature’s ‘mysteries’ to invisible gods. He also mentions, for the first of only three times in all his works, the metaphor for which he has become famous (for all the wrong reasons) of an ‘invisible hand’ (in this case of Jupiter, the Roman god, not the planet). In itself, not much of a ‘smoking gun’, but nevertheless in my view, with all that followed, it is significant. While criticising pagan superstition, he can be read as criticising all religious superstition, given also that his essay reviews the history of those astronomers compelled to follow Christian beliefs about the nature of the Universe, as enforced by God’s Earth-bound interpreters.

Smith’s criticism of the convoluted reasoning offered by philosophers to fit the Universe into the ignorant certainties of the Church is also a critique of any role for religion in deciding on the ‘wonders’ of Nature, all explainable by science. While that is a long way from revealing his atheism, it is a large step towards it, a point underlined by keeping his ‘Astronomy’ locked in his bedroom bureau from the 1750s, when he completed it, for nearly 40 years until he died, and leaving instructions to his literary executors, Professors Black and Hutton, to publish it.

Seventeen years earlier, he had informed David Hume where he kept his unpublished ‘juvenile’ essay with instructions to publish it in the event of his death while away on a visit to London (1773-76). It is clear that he had not shown it to David Hume, or to anybody else, but was determined that it survived his intentions to burn all of his other manuscript notes (duly carried out in 1790). The essay must have had high emotional significance for Smith. I surmise that its significance for him was that it marked his turning away from religious belief, as represented by the Church. Whether he remained a Deist or became an atheist is something he took to his grave.

It is fair to ask why Smith never stated his disbelief explicitly. Why didn’t he publicly reject the supernatural religion within which he was brought up by his mother? That he didn’t do so is taken to confirm his belief in the religious language of ‘Moral Sentiments’ and (less so) of ‘Wealth of Nations’. If he had not been of a religious mind, why didn’t he correct what he published?

Consider his life-long two-fold self-denying ordinance: first, never to embarrass or upset his mother, a deeply religious woman by all accounts (see Dugal Stewart’s biography of Smith, 1793); second, never to give offence to the ‘Great Orders’ of society, which had nurtured and advanced his personal interests of enjoying an academic career that looked bleak after he left Oxford, that enabled him to ‘retire’ on a pension for life to pursue scholarly studies in reasonable comfort and security after his tutorship of the Duke of Buccleugh (1764-66), and that kept him in convivial company at all levels, from street-porters and day-labourers, to the ladies of salons, gentlemen of business, Dukes, Cabinet and Prime Ministers, Judges and personages of the British State, and above all, to his intellectual contemporaries of the Enlightenment, in Scotland and abroad, who shared his passion for knowledge.

Now consider the alternative life if he had opened up on the then solid adherence across all sectors of society to revealed religious belief. He was already well versed in the unattractive consequences of suspected apostasy or a reputation for outright atheism in the mid-18th century, either personally or for all those on whom he relied in two-way exchanges of harmonious relationships, the stuff of his ‘Moral Sentiments’. The treatment of David Hume (who never publicly admitted to atheism) was a salutary lesson on the consequences of challenging deeply-felt beliefs. Denounced as an atheist, abused personally too, and a regular target for more repressive measures to be invoked, Hume was denied Chairs by both Edinburgh and Glasgow Universities (to their lasting shame) on popular religious grounds of his ‘unsuitability’, and only survived socially because of his personal qualities by those who knew him, even from within the Church. It was not an encouraging precedent.

What would Smith lose by non-compliance with the accepted norms of prudent discourse, albeit, within the barely tolerable boundaries of religious vigilance against blasphemy? The presence of religious zealots was real, not imaginary. Professor Hutcheson, Smith’s mentor, had suffered the attention of these ignoramuses while Smith was a student. To avoid such treatment, all he had to do was to avoid causing gratuitous offence. Therefore he wrote in code. This is how scientists learned to survive in Soviet Russia and how many qualified people do so in today’s Iran and other places. And, not surprisingly, many scientists (and politicians!) in the United States and Europe today survive quietly in modern secular democracies, where legally they are free to write what they wish, but who also admit privately, but not publicly, to being atheists. Few are prepared to refuse compliance with religious observances, finding it easier to go along with religious norms than take public stances.

In short, observance of certain social habits based on religious practice is the default behaviour of many self-confessed atheists because the social costs of defiance are not worth it. In Smith’s century, the consequences of proclaiming one’s non-compliance were serious, or believed to be, and he considered that observing via coded dissent was a trifling issue in his larger agenda. He knew where he stood and his closest friends who shared his ‘social hours’ knew too.

The Enlightenment revealed the impossibility of the biblical creation and few of the luminaries could have been truthful in their expressed beliefs and default conduct (attending church services, etc.). James Hutton, the geologist, one of Smith’s closest friends, realised that the Earth was many millennia older than the Church believed as an article of faith. As they conversed socially, or walked together on the remains of Edinburgh’s long extinct volcano, he exchanged views on Smith’s ‘Four Ages’ model of society’s origins, of the origin of languages, of the pre-historic origins of the ‘propensity to truck, barter, and trade’ amidst the ‘division of labour’, of the long origins of society’s moral sentiments (of which Hutton also published a book), and the lessons of history following the Fall of Rome. Smith regarded his contributions to the betterment of humankind to be far more important than possible misunderstandings of the religious language in passages of his books.

Indeed, if his books are read carefully he his adroit at the rhetorical art of appearing to say one thing ambiguously while implying the opposite. They call out for the reader to realise he is not quite saying what some might believe him to say. In my longer response to these points, I note the evidence for my assertions in this regard and when I publish the manuscript for my forthcoming Adam Smith for Palgrave’s series, I shall share them with readers.

It is also worth noting that after his mother died, Smith in subsequent editions of Moral Sentiments toned down several religious statements in conformity with release from his self-denying ordinance. Further, that he was concerned that publication of his ‘juvenile’ essay before he died was directed solely at its reception by living humans and not by an omniscient personal god, as taught by the main religions founded on Abraham (Judaic, Christian and Islam), shows beyond doubt that he did not believe in an ‘after life’. If he did so believe, publishing after he died would protect him from the living only, but not from a supernatural god who knew everything and would hold him to account for what he did while alive on Earth. That act itself was his coded demolition of modern arguments favouring his adherence to a belief system associated with religion.

I conclude: Smith was not a believer.

Monday, November 13, 2006


I am en route for France for a couple of weeks quiet research and cannot post until I set up my systems there, hopefully by Wednesday.

Apologies for a lack of posting for a couple of days.

I have several interesting items items in a queue awaiting comments, including one on Smith's alleged deism or the alleged teleological basis for his theories.

Sunday, November 12, 2006

Pseudo-Mysticism of Chicago Economics





Gavin Kennedy

There is the usual bout at large these last few days of insensitive exhibitions of Chicago’s errors in ascribing to Adam Smith, in search of authoritative endorsement, its views on the motivations of economic actors (the neoclassical Homo economicus). Why they need to wrap their inannimate mathematical doctrines equilibrium in a pseudo-mystical verbiage of disembodied ‘invisible hands’ is a subject possibly of great interest to students of pagan belief in ‘invisible gods’, who guide our fates for good or ill.

Today, it is only sad.

John Mackey, an advocate of whole foods capitalism, for example, pushes a view of self interest that had little to do with Adam Smith.

“Conscious Capitalism: Creating a New Paradigm for Business Part II
This is Part II of Conscious Capitalism
Creating Wealth, Profits, and Growth”, posted by John Mackey

‘Why isn't the pursuit of our own self-interest enough? Perhaps we need to look more closely again at what Adam Smith wrote. The Wealth of Nations was a tremendous achievement, but economists would also be well served to read Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature is not just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest; for many people, they are more important.’

Agreed, it is always beneficial to read both ‘Moral Sentiments’ and Wealth of Nations’, though it is perfectly possible from reading ‘Wealth of Nations’ alone to understand that Smith did not see self-interest in the narrow fashion that the Chicago neoclassical model requires for its assumption of Homo economicus as a selfish maximiser.

“Q. My final point of clarification is the quote from Adam Smith that is frequently used to try to negate my point of view. The quote is "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." Adam Smith in The Wealth of Nations.
A. To me this quote has two parts to it, the first one is a reinforcement of Adam Smith's famous 'invisible hand' metaphor (which I think was the most profound insight into social history ever made) which implies that through a voluntary exchange people acting in their own self interest, pursing their own good create value for the greater society. That is true! I am not arguing against that. I believe in the invisible hand. Period. The second part of the statement, however, is what I disagree with, "I have never known much good done by those who have affected the trade of the public good." The fact of the matter is that much of the good that is done in this world is done by people who intend to do the good. The invisible hand metaphor correctly points out that much good is done for the public accidentally, so to speak, by simple pursuit of self-interest. Through voluntary exchange, acting in self-interest, parties both voluntarily exchange, and both parties benefit or the exchange wouldn't happen. That process creates a social good, true, but it is also true that very much good is done because people have an intention to "do good". All the "good" is not done accidentally.

I believe that the 'invisible hand' of Adam Smith should be supplemented by the 'visible hand' of intentional "do-gooding", and that individuals, governments, and businesses have endless opportunities to attempt to do-good in the world. Business has the opportunity to "do good" and create value for all the various constituencies that trade with the business voluntarily. I also believe that supplementing the 'invisible hand', with a 'visible hand', if done consciously, on an ongoing basis by individuals and corporations around the world, would help push humanity into an era of accelerated progress that would be unprecedented in world history. That is what Whole Foods Market is trying to do, and that is what Conscious Capitalism really means

The first sentence of the answer betrays the error it is trying to fit into the metaphor of an invisible hand. To accord to Smith’s use of a metaphor as “the most profound insight into social history ever made” is plain silly. What 20th-century neoclassical economists made into a theory of ‘the’ invisible hand had little to do with Smith’s use of it.

The metaphor of an invisible hand does not assert what is claimed for it, namely “that through a voluntary exchange people acting in their own self interest, pursing their own good create value for the greater society.” For a start, Smith used the metaphor of the invisible hand only once and in Book IV, or mercantile political economy, not in Book I on exchange transactions. The spreading harmony of mediated self interest (note, not advancing them) had nothing to do with ‘an invisible hand’.

Some instances of the consequences of acting in a certain manner might have the unintentional outcome that it creates ‘value for the greater society’, and it may do so in the case that Smith quotes in Book IV, but it was not stated in the absolute form that individuals necessarily would ‘create value for the greater society” – they may just as well destroy value ‘ for the greater society’. Indeed, Books III and IV of Wealth of Nations demonstrate this possibility in large measure in Smith’s critique of mercantile political economy, as do many other passages when he discusses the wealth destroying effects of nefarious ‘merchants and manufacturers’ and their consequential effects on the progress of society towards opulence.

Read John Mackey’s post at:

Saturday, November 11, 2006

A Strange Notion from Greg Mankiw

A Grad student in economics asks Greg Mankiw, the top Harvard US Professor of economics about what appears to be a barren prospect of doing a PhD in economics given the state of neoclassical economics:

“I am doing my Masters in Economics here in the US and I recently went to a Graduate Economics Students Conference in my city. I sat through a whole day of paper presentations and the one thing that struck me was how incredibly technical, narrow and to some extent pointless, some of the research was. It seemed like in a quest to do something original, a lot of graduate students in economics are diverting all their energy towards coming up with things that have absolutely no implications in this world. Most papers I saw were so narrow and simply forms of academic gymnastics that it seemed like the whole point of research in economics was lost (maybe that is the point of research in economics today).”

To which Greg Mankiw’s responds in part:

1. Economics teaches that activities often run into diminishing returns. That may be true of research in economics. The early economists got the really great ideas (Smith on the invisible hand, Ricardo on comparative advantage, Pigou on corrective taxation, etc.). When we modern guys arrived on the scene, the juicy low-hanging fruit had already been taken.”

To assert that “Smith on the invisible hand” is among “the really great ideas” and an example of “low-hanging fruit” is, well, frankly less than credible. It is, however, par for courses in modern university departments of economics.

Adam Smith’s corpus is reduced to an en passant metaphor? An invisible hand was never during his life-time considered by anyone, including himself, to be more than just a metaphor – an example of his capacity for rhetoric to make a point, not about markets, not even a theory of anything and not even an idea, let alone a ‘really great one’.

For many decades after he died in 1790, nobody drew attention to his so-called idea of ‘an invisible hand’; that came much, much later in the 20th century. How is it he missed it, his colleagues missed it and his immediate 19th-century successors missed it? How can a metaphor, empty of content, ambiguous in the extreme, and only used once in Wealth of Nations become one of Adam Smith’s ‘really great ideas’?

Of what is Greg thinking? And whatever he thinks he is thinking, on what basis in Smith’s great ideas does he think ‘an invisible hand’ had a role other than as a metaphor?

The self-interests of individuals may lead them unintentionally to contribute to beneficial outcomes for society (he gives examples in Wealth of Nations) and he gives as many, if not many more, instances in Books III and IV, for example, of individual self-interests contributing substantial dis-benefits to society, in mercantile policies pursued by governments and legislators under the influence of special interests, of merchants and monopolists raising prices, introducing protectionist measures and reducing competition for their own gain at the expense of consumers and other would-be producers in their own and in foreign countries, and at the expense of reducing economic growth below what it would be if their nefarious self-interests were curbed.

These ideas in the his Wealth of Nations disqualify the passing metaphor of an invisible hand as a candidate for a ‘great idea’ in economics, on or near the same level with Ricardo’s comparative advantage, or even at or near the same level as Smith’s identification of the ‘propensity to truck, barter, and exchange’ as the driving force of economic development and growth.

Adam Smith Did Not Have a Labour Theory of Value for Other than 'Rude' Society

The association of Adam Smith with a labour theory of value has long been an embarrassment to some economists who candidly assert that on this aspect of his economics he was just plain wrong, while for socialist economists it appears as an encouragement to their adherence to Marx’s version of a labour theory of value. Neither group of economists is right about Smith and his alleged labour theory of value.

Robert Vienneau, an economist who writes the ‘Thoughts of Economics’ Blog, at

prompts me to go over, briefly, what Smith was about when it came to writing his analysis on value in Wealth of Nations (1776) and lecturing on it in his classes at Glasgow (Lectures on Jurisprudence, 1763-4). As per usual Smith's presentation of his fairly straightforward ideas is muddled together and obscures the clarity of his thinking if read too quickly. I shall unravel them here.

Smith, in common with the traditional 18th-century Scottish syllabus, presented to his moral philosophy class a series of lectures on political economy, and in a similar order, though not necessarily content, as followed by his mentor, Professor Francis Hutcheson up to 1746, and as heard by Smith from 1737-40 (see Francis Hutcheson, 1755 (posthumous), A System of Moral Philosophy).

Smith took an historical, social evolutionary approach to his subjects. His successors felt comfortable with it but gradually eliminated all ‘extraneous’ historical matter from political economy, creating the sanitised subject we know today as neoclassical economics. In this context, the source for the confusion about Smith’s alleged labour theory of value is evident. Simply contrasting isolated paragraphs from Wealth of Nations with passages from Karl Marx to conclude that both had a labour theory of value is disingenuous, and relies solely on their failing to read Wealth of Nations carefully.

Under Smith’s schema, mankind passes through ‘four distinct states’: the ‘Four Ages’ of Hunters, Shepherds, Agriculture and Commerce [LJ(A) i.27: p 14]. He finds in the evolution of property rights, and the associated instruments of justice, a basis for the progression of humankind from ‘savagery’ to ‘civilisation’. Marx grafted onto this progression (though ‘morphed into’, might be more appropriate) his theory of ‘class struggle’, and also changed the basis of the transition. But for Smith, property was the inescapable cause/ consequence of progress, and its driving force was the ‘propensity to truck, barter, and exchange’, allied, inescapably, to the division of labour (WN I.i, ii, iii).

Robert Vienneau, for example, selects quotations from the same Book in Wealth of Nations (WN I. vi) but drops their context. Capital (or ‘stock’, as it was known) has a long, largely unwritten history. Smith writes of a distinct state of mankind:

In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land …’ (p 65; all references are to the Oxford/Liberty Fund edition).

At this time, he ventures, there was no ‘property’ in a societal sense; there was ‘society’ certainly, because humans, like their primate cousins, have always lived socially, and the bounties of nature and the fruits of labour belonged to those who collected, predated, or expended effort to acquire them. Labour, necessarily, was the sole source of ‘value’ and ‘labourers’ ‘owned’ the full fruits of their efforts (in so far as these terms meant anything in such times).

The transformation from ‘the early and rude state of society’ to shepherding, and then to agriculture, introduced elements of property. Those who ‘owned’ the sheep, or whatever, kept what they caught and tamed, and watched over them by driving off predators and other humans. The basis by which the flocks or herds were shared among their ‘owners’ is not known exactly, but we may surmise it was related to the norms by which the human bands or tribes were organised. We may note that shepherd tribes eventually overthrew the Roman Empire and re-divided out the land and what was on it.

With the spread of farming in the agricultural state, property in land (and the accompanying laws of land ownership, transfer and tenancy) added complexity to social structures. Agricultural societies formed settled civilisations, some of which were marked by towns and cities, and wars over ownership were a common feature. One element is inescapable; the product was no longer owned by the labourer. What had happened?

Smith suggests the division of labour combined with the propensity to exchange (bargaining) altered titles to the ownership of the bounties of nature and the fruits of labour. Labour can only be divided if individuals specialise. He gives the case of two hunters (WN, p 65) considering the exchange of beaver meat for venison. He also gives the case of a savage who makes arrows in exchange for venison, because he gets more venison this way than relying on his own hunting, and following exchanges with a hunter, who not having to make arrows, gets more venison from his hunting than he would with making his own arrows (LJ(A) vi.55: p 351). This advance is the beginning of the separation of the labourer from his product and from the products of his product. It is also the origin of capital (stock).

While labourers make their own implements, and rely of their own surplus food and clothing (the original ‘grub stake’ stock) they ‘own’ their product unambiguously. There are no deductions from it. What he shares with his ‘family’ and ‘dependents’ is entirely up to him. What he shares on occasion with unsuccessful or less successful other hunters and dependents depends on societal norms of (selective) reciprocation when the fortunes of the hunt are reversed (some of which reciprocation, evidenced by ‘modern’ norms in surviving hunting societies, includes sexual favours from the women of less successful hunters).

Property changed these norms gradually as the notion of ‘capital’ stock formed. In exchange for the implements (knowledge) of hunting and farming, including stock (the wherewithal to continue hunting, or commence shepherding or to live upon while crops grew to harvest), others exercised their claims on the product of labour (bounties of nature and fruits of labour). The labourer was no longer the sole owner of the entire product of ‘his’ labour:

He must in most cases share it with the owners of the stock which employs him’ (WN p 67).

And as productivity from specialisation due to the division of labour and the propensity to exchange (one came with the other, Smith insists), the possibility of some labourers ‘saving’ a portion of their product and accumulating even a small amount of it, initiates a long process of what becomes the first ‘stock’ once it is made available to others. Where and how it went from there is not known in particular cases, but that it was one of several possibilities is sufficient for this arguemnt.

Among other possibilities, the technological evolution of farming amidst hunting states is noted. Smith points, off-handed almost, to reports of elements of agriculture among North American tribes in which women scatter small amounts of corn stalks to grow seasoning for meats (LJ(A) i.29-30; P 15), but reports nothing in North America on the scale of the agricultural innovation in east-central Europe (or indeed the habits of agriculture in Central and South America).

Shepherding took firm root in Eastern Europe and Western Asia and co-existed with farming for millennia, with long periods of hostility among both states in contingent societies. Cain and Abel’s violent dispute between the farmer and the shepherd in Genesis is indicative of this tension, as is the dénouement of the final destruction of Rome (agriculture) by the Germanic tribes (shepherds).

Shepherding and agriculture moved the notion of property into centre stage in human societies. Keeping the source of food (and power) intact requires the marking out of boundaries – animals destroy crops; and other people take what others have sowed or have tended.

In the long run of history, with its many manifestations of many possible forms of development, societies developed through the discovery of property. In some cases, property was individual, in others tribal, and others societal. In fact, every variation has probably been tried over the tens of millennia since ‘early and rude society’, when, as John Locke expressed it, ‘all the world was America’. Much is written about the ‘oriental despotism’ of the State ‘hydraulic’ societies of the Near East and Asia, the tyrannies of Incas and Aztec’s, and feudalism of Europe, all based on agricultural societies.

In the mid-18th century, many variations of the four states of societies co-existed both in fact and currently, and in the historical record. It was from that perspective that Smith scoped out in summary form the evolution of the theory of value.

His chapters in Book I keep going back and forth across a panorama of history as he develops his analysis and, unless he is read carefully, this may be missed, especially when he sometimes jumps from describing labour as a source of value in ‘rude society’ and then seems to be discussing commercial society without always making clear he has moved from one state to another, and that earlier statements on ‘the whole produce of labour’ belonging to the labourer no longer apply, once elements of exchange from the evolution of products for immediate consumption to the evolution of capital to produce more product are introduced, both of which depend absolutely on the distinction between reciprocal transfers between the owners of private property.

The act of exchange itself is the recognition of property for a bargained price, an essential component of which is the mutual cancellation of property rights in whatever is foregone in order to receive whatever is traded.

A society based on the labourer owning the whole product of his or her labour is possible – it was the norm for scores of millennia – and inevitably had a low material standard of living (and was associated with near absolute ignorance, belief in invisible ‘gods’ and credulity). The division of labour and the propensity to exchange opens the prospect of increasing access to a wider variety of goods than any one individual can or could make for themselves.

In capital assisted labour, the product is the labourers only as long as the capital is owned by the labourer and self-supplied. Labour using other factors (land and capital) owned by others must share its product with all who have claims on the product.

Smith recognised this explicitly (WN page 67) and in doing so moved to a theory of the distribution of the returns from production that was no longer a labour theory of value (it retained elements of ‘cost of production’ theory). In principle, it is no different from the consequence of exchange by bargaining: each party foregoes its ownership of what it offers and acquires ownership of what it receives. Everything Smith understood about the social evolution through the states of society follows from ‘rude’ to ‘commerce’ is based on recognising this principle.

Robert Vienneau concludes:

“I find it of interest that Adam Smith offers this account while rejecting the (embodied) labor theory of value. I'm not sure this account makes sense, as a quantitative approach, without the labor theory of value, or, at least, without Marx's invariants.
I do not think the tremendous continuity, as well as differences, between the ideas of Adam Smith and of Karl Marx is any secret among scholars.”

I do not think his conclusions are warranted about Smith; I have no comments on his statements about Karl Marx and his theories of surplus value, alleged exploitation, or his labour theories of value.

Smith, however, did not have a labour theory of value for any state in society other than ‘rude’ society in pre-history.