Sunday, December 31, 2006

Smith and his Non-Labour Theory of Value in his Age of Commerce

Here is a typical piece of contentious theory advanced in good faith by a conservative economist, which distorts Adam Smith’s legacy. Its author, G. Stolyarov II, who posts in a conservative Blog, Free (at:, entitles his post: 'Arguments Against the Labor Theory of Value' (21 December 2006.

He writes:

“I shall refute here the proposition that “the economic value of all goods and services is derived from the cost of their production and ultimately from the labor expended on their creation—be it measured in terms of the time, effort, or disutility required to produce the goods or services in question—and the labor expended on the creation of goods necessarily endows them with economic value.” This proposition is the essence of the labor theory of value, a false view nonetheless embraced by such notable thinkers as Thomas Aquinas and Adam Smith and used by Karl Marx to justify socialism. I shall then argue that the utility theory, which views economic value as identical to the benefits gained by individuals from goods and services, is a superior explanation of economic value.”

That the labour theory of value as it has come to be known is ‘false’, I concur; that it was the basis of Karl Marx’s ‘justification of socialism’, I concur (when he turned it into a theory of the exploitation of ‘surplus value’); that a theory of economic value based on some version of utility and market pricing ‘is a superior explanation, I also concur; but that Adam Smith ‘embraced’ a labour theory of value in Wealth of Nations, I have, as we say in Scotland’ my doubts.

The problem of the misattribution of a labour theory of value to Smith arose from the context and times in which he wrote. In the 18th century and much of the 19th century, economists advanced the current consensus that labour was the measure of economic value. It didn’t become a loaded political question until it became entangled in crude (even naïve) ideas of socialism and part of the agitation of some intellectuals against the early vestiges of what was rapidly becoming ‘capitalism’, a word invented for what was happening, though mainly in the forms of finance and rentier capital (William Makepeace Thackery’s novel, The Newcomes, about one such in 1854). His contemporary, Karl Marx picked up the word, or popularised it from German, in his book, The Capital, and ensured it a worldwide usage thereon.
Smith’s presentation of a theory of value is short of his much vaunted pride in perspicuity (Marx’s presentation of his version is absolutely muddled in contrast, and not a little ‘mystical’ too).

Smith social-evolutionary model applied to all his writings and he began his theory of value as usual with an historical consideration of how individuals moved from the ‘rude’, ‘savage’ state towards the Ages of Man: Hunting, Shepherding, Agriculture and (‘at last’) Commerce (Lectures in Jurisprudence, 1763-4).

In the ‘rude’ state (which the 18th century equated with the lives of North American ‘Indians’, the continent’s first invaders), hunters dominated the mode of production (until the 20th century the role of the far more important Gatherers, in terms of quantity of food, was unrecognised, as was the even earlier and much longer unknown stage of foragers, scavengers and gatherers that dominated Homo sapiens pre-history). John Locke was of the opinion (correctly as it is now known) that ‘in the beginning all the world was America’.

In the early state each hunter was self-sufficient – he made his own tools, his own clothes, his own shelter. He owned the product of his labour. That was Smith’s starting point. There was no exchange, as economists know it, though the potential for it existed within the extended families that composed the groups. Smith located the origins of the propensity to ‘truck, barter, and trade’ in the ‘necessary consequence of the faculties of reason and speech’, which led to the division of labour, but decidedly not from the ‘divine’ or ‘secular’ plan of anybody, mortal or otherwise. The process was ‘the necessary, though very slow and gradual consequence’ that had ‘in view no such extensive utility’ of where the human propensity would take it.

Spread over hundreds of thousands of years (the toolmakers preceded the emergence of Homo sapiens from the Hominids), the simple fact of each hunter owning the product of his or her labour, is the dominant fact of human life. The crude labour theory of value in terms of the individual ownership of the products of labour, pre-the emergence of property is Smith’s valid point and the sole extent to which he endorsed anything like a labour theory of value. In the beginning artefacts and objects had utility value only, because exchange was not invented until the division of labour reached a more sophisticated level (crudely, sexual relations for contributing to the extended family’s diet and comforts).

Smith’s exposition appears unclear in Wealth of Nations because he does not preface his remarks with details of the process of evolution but states explicitly that ‘it does not belong to our present subject to enquire’ (WN I.i.1: p 25). Analysing closely this chapter I think he was merging at least two pages of lecture notes and kept dipping in an out of two themes. But the bottom line is that he did not carry the rude state’s labour theory on and into his analysis of the situation after property was introduced and established.

In handling in Chapter V, Book I, the transition from labour as a measure of value (easier to think of it as the ‘price’ to acquire something) to its money price (after the end of barter), Smith’s exposition suffers from trying to account for a process that nobody recorded and which lasted for many millennia.

Once property appeared (shepherds forming herds and flock and defending them against theft; farmers building fences and barriers to wandering animals and human beings), the division of the ‘revenues’ from exchanging the products, no longer belonged to the sole owners of the products of labour, but to the owners of the factors required to produce it, who shared in the revenues, not ‘fairly’, of course – property made a great difference to the raw egalitarian brutality of human relationships.

Saturday, December 30, 2006

Another Pop at Foley's Fallacies

It is always pleasurable to read an intelligent piece by someone who knows something about Adam Smith and who keeps up with mainline controversies on the subject. One such is Bruce MacEwan, a practising US lawyer and creator and host of a legal blog, “Adam Smith, Esq. (‘…an inquiry into the economics of law firms)”.

I bookmark ( site for my occasional visits which proved their worth today in a posting entitled "WEALTH" AND "CONSCIENCE". Bruce MacEwan writes in a comment on David Warsh’s review of Duncan Foley’s, ‘Adam’s Fallacy’, discussed here several times, on the basis of which I re-titled Foley’s book, ‘Foley’s Fallacy.’

Where Foley goes wrong in his critique of neoclassical economics (a sub-branch of late 19th-century mathematics) is he blames Adam Smith for where the profession has gone. While agreeing that neoclassical economics under the beady eyes of Chicago’s Homo economicus is a dead-end, Foley’s fallacy is to pin its causes on Adam Smith who is, in fact, wholly innocent of the charges, and Foley makes his case solely by tampering with the evidence (admittedly the crime scene was compromised originally by the neoclassical consensus).

Bruce regales Foley with the following dismissal of his fallacy:

“To start, there could be no better introduction than this discussion of the interplay between his most famous work, obviously, The Wealth of Nations, and its predecessor by 17 years, the relatively unsung Theory of Moral Sentiments.”

“Indeed, these extra-homo economicus considerations are not just competitive with rational, gimlet-eyed, calculating analytics, at times they overwhelm "reason" altogether:

"What is it that prompts the generous, on all occasions, and the mean, upon many, to sacrifice their own interests to the greater interests of others? Is it not the soft power of humanity, is it not that feeble spark of benevolence which Nature has lighted up in the human heart, that is capable of counteracting the strongest impulses of self-love?"

Now, for some reason, the received wisdom handed down over 200 years later about Adam Smith is that he abandoned these views with publication of The Wealth of Nations. Well, I'll spare you the academic arguments, but suffice to say there's not a scintilla of evidence that was the case. Indeed, the better reasoned side of the debate, able to marshal far more evidence in support of its view, is that Smith intended a third and possibly even a fourth volume (cut short by his death, and his mandated destruction of all his unpublished manuscripts) reconciling and extending Moral Sentiments and Wealth of Nations by adding to the mix a treatise on the theory and impact of law and another on science and the arts.’

‘Moral Sentiments’ is indeed ‘relatively unsung’ compared to ‘Wealth of Nations’ and it is marginally less well read by contributors to the ‘received wisdom’ (not that many of them show evidence of reading either of Smith’s books, beyond some quotations torn out of context and bled of their original meaning). It is also worth noting, and is particularly germane to the point that Bruce MacEwan, David Warsh and I agree upon, that while 17 years separates their publication in 1759 and 1776 respectively they were in fact developed as sets of ideas together during Smith’s earlier career as a Professor at the University of Glasgow between 1751-64. We know this to be true because his lectures were copied down as they were delivered by some students and these were published between 1885-1980, entitled as ‘Lectures in Jurisprudence’, ‘Lectures in Rhetoric and Belles Lettres’, and ‘Early Draft’ of Wealth of Nations (available in the Glasgow edition, published by Liberty Fund).

If there had been a deep cleavage of ideas on moral sentiments and political economy, this would have been obvious to Smith as he taught both subjects together to the same students in his classroom.

In addition to knowledge of the minutiae of the contemporary evidence, we also have knowledge of their contents, prompting Bruce MaxEwan to ask:

“So where are we left here in the 21st Century?

Economics, a somewhat feckless discipline for the last few decades (there you have, in a nutshell, why I never entertained the notion of pursuing a Ph.D. in economics), has opted to "model what it can at the expense of ignoring what it cannot," and "moral sentiments" are famously unsusceptible to modeling.
One of my fonder, if milder, hopes is that my beloved discipline of economics will come to grasp more strongly the world as it really is with all its human complexity and contradiction, and return from its exile in the arid, mathematically intricate "blackboard economics" domain of homo rationalis economicus.”

To which I would join him in a New Year toast from Edinburgh to the realisation of his hopes to pull back modern economics to the political economy as understood by Smith and to which other disciplines could contribute, especially law, a subject on which Smith took a close interest (he was awarded his LL.D by Glasgow for his impressive lecture series).

I am never comfortable with so-called scientists who abhor the notion of doing something so mundane as looking outside their windows at what is happening in the real society and real word they live in. ‘Tis a pity that Duncan Foley started on the right track but now assists the perpetuation of the fallacies about Adam Smith as the corner stone of his own fallacies – and follies.

Persistence of Protectionist Drivel

A Mr Paul Kenny, General Secretary of the GMB (one of Britain’s larger trades unions) reveals the shallowness of his internationalism (a much flaunted virtue of people of the so-called Left) in his attack on Mr (from today ‘Sir’) James Dyson, inventor and manufacturer of the revolutionary Dyson vacuum cleaner.

According to the lively economics Blog, Stumbling and Mumbling, Mr Kenny asked, sarcastically – with that special bile practised by Little Englanders: "Do people now get a knighthood for services to exporting jobs?"

Chris Dillow, the economist who confronts such issues on Stumbling and Mumbling, calls this outburst from Mr Kenney an example of ‘Trades Union Stupidity’ and ‘drivel in both economics and ethics.’ And so it is.

Chris Dillow sums up the economics admirably with: “Had production of Dysons stayed in the UK, they would have been more expensive to make. Housewives buying Dysons would therefore have less money to spend on other things, like getting their hair done.”

He could have gone further. Expensive UK-made vacuum cleaners would have become less competitive from imports of rival products and the sorry cycle of UK manufacturing would repeat itself, destroying jobs in the process and not providing the revenues that could replace them. Scotland used to have thousands employed in shipbuilding, steel, coal, textiles and motor cars, to name a few. How? They’ve all gone, and worse, from the protection they received for decades, instead of innovating and substituting for profitable jobs, their net revenues, when they had any, and their massive taxation subsidies that could have been better used elsewhere (including in the private incomes of households taxed to pay for them), were dissipated on falsely ‘preserving jobs’, often low-paid, semi-skilled and technologically uneducated, that when the government eventually faced up to the realities appreciated by King Canute, it was too late to do other than close them down.

Even then, trades union leaders, like Mr Kenny and his predecessors, led wasteful campaigns, costing vast sums unnecessarily on police crowd control, demanding that every single job was preserved, as if in aspic, doing exactly whatever the people involved did, for ever at public expense. One notorious trade-union leader demanded (and was supported by some MPs) that no coal mine ever closed until every last ton was extracted from a pit, no matter what the cost.

While Britain paid attention to this nonsense, employees in other lands, both rich and poor, attended to developing new industries with new technologies and refining their manufacturing skills. That is why Dyson now manufactures in Malaysia, ships its output to the UK (and around the world) and rivals the largest and oldest vacuum cleaner company, Hoover, profitably and with confidence. Those profitable earnings are taxed and distributed in Britain, some of them replacing used equipment, funding continuing R&D, and supporting sales in Europe, all of which involve jobs.

Chris Dillow notes that: ‘If "exporting jobs" were a bad thing, we'd all be better off doing everything at home - growing our own food, making our own clothes and so on. But this is obviously absurd. As Adam Smith pointed out, we get richer through the division of labour. And this requires that jobs be exported.’

Absolutely true. Where do trades union leaders get their ideas from? To some extent their myopic vision is conditioned by the brutal fact that they serve the interests of their members, and not the interests of other workers, including members of other unions, and certainly not, judging by Mr Kenney’s insular anti-foreigner attitude, with the interests of foreign workers in poorer countries in mind, which is more in keeping with a reactionary colonial imperialist from the 19th century, than the self-image that union leaders, and some of their members, like to bask in, while in private regarding foreigners as the ‘enemy’.

It is strange and it should be surprising, but we have got used to it I suppose, that over 200 years after the death of Adam Smith, who wrote about the enduring and beneficial division of labour (including the international division of labour in the manufacture of the day-labourer’s woolen coat in Book I, Wealth of Nations) and the fallacies of protectionism, that people in prominent positions still mouth what Chris Dillow, rightly if boldly, describes as ‘drivel’.

Bookmark The Stumbling and Mumbling Blog to correct the doses of drivel offered up by luddites like Mr Paul Kenney.

The above piece is found at

Thursday, December 28, 2006

Galbraith and Stiglitz's Naive Belief in 'Santaa' Government

John Kenneth Galbraith understood capitalism as lived - not as theorized. He wasn't as celebrated as Milton Friedman, but he enhanced our grasp the nature of the market economy,” by Joseph E. Stiglitz, who writes:

What Galbraith understood, and what later researchers (including this author) have proved, is that Adam Smith's "invisible hand" - the notion that the individual pursuit of maximum profit guides capitalist markets to efficiency - is so invisible because, quite often, it's just not there. Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action
(in Christian Science Monitor (, Boston, Mass. (28 Dec). Read it at:

The ‘notion’ that Joseph Stiglitz castigates had nothing to do with Adam Smith; it had plenty to do with Milton Friedman and the Chicago School of which he was a prominent member. Stiglitz uses it to enhance Galbraith’s reputation and he repeats one-sided notions of how markets work.

For example, markets force firms to internalize costs that a country’s laws set for them, but, where the state does not compel them to do so, they externalize costs where they can. Hence, we have the problem of pollution unpaid for by those who create it. But this is not just a problem unique to markets.

The world’s worst polluters by far were the communist state governments of Soviet Russia and its allies, and today’s government in China, and if there is no other power operating to curb government pollution, as is the case in a socialist or Marxist state, the polluters in their industries, and in Soviet Union in their armed nuclear forces, are free to destroy anything they touch, making pollution a clear example of government failure.

The notion that governments are necessarily a solution to the externalities caused by industries unconstrained by laws, to say the least, is nonsense, and one would think, beyond the complicity of a Nobel Prize Winner such as Stiglitz to encourage. After all, given the number of Nobel Prize winners from the United States, I am less certain that the ‘lack of basic research’ is a problem of US capitalism.

Democratic societies have the means to curb governments; ‘socialist’ or ‘anti-capitalist’ governments favoured by Galbraith (and Chomsky) are beyond similar constraints. Whether particular democracies adopt policies that suit the times, is a problem of government, not of markets.

That there is no such thing as a theory of invisible hands guiding markets is, at least, something Stiglitz and I have in common, but having reached that conclusion, and the certain knowledge that Smith did not have in mind such a role for his metaphor (never his theory), unlike Stiglitz and Galbraith I have not skeltered off to the shelter of a naïve belief in governments as the solution.

History shows that in the 19th and 20th centuries people living in democracies have ground down, if not yet eliminated, many negative features of their societies (child labour in pits and mills, slavery, racism, numerous prejudices against minorities and women, pollution, and social waste of all kinds).

There is still a long way to go on these and many other issues in democracies but the furthest distance to travel on these issues is located in all dictatorships and in those countries in transit to markets.

Discounting Milton Friedman’s staunch defence of freedom, merely to replace it with Galbraith’s naïve belief in ‘Santa Government’, is not worthy of Joseph Stiglitz.

Smith's Praise of Public service

From the Blog, The Liberal Order (‘in pursuit of a classical liberal order’) a short posting headed, “Altruism vs. Self-Interest” (27 December) contains what most neoclassical economists would consider to be vintage Adam Smith:

“(One of) Adam Smith's great insight(s) was that self-interest, channeled within a system of institutions and culture promoting specialization and voluntary exchange, would bring about a peaceful social order and improve the human condition far better than any other human motivator, including and especially altruism. This notwithstanding, people will always promote and exalt altruism as being a superior motivator. Unfortunately,
this will certainly fail, once again proving Adam Smith right.”

(Read it at:


Yes, but Homo economicus is not quite the whole story. In tandem with the well-known example from the self-interested motives of the ‘non-benevolent’ ‘butcher, the brewer, and the baker’ in a market transaction, the undoubted insight of Adam Smith as represented by The Liberal Order statement and its accompanying example would be self-evident. The example of rstaurants not charging for food is well taken.

Of that aspect I have no quarrel. In case readers go away with unanimous conviction of a ‘closed case’ on pure self-interest, I shall draw attention to the more nuanced Smithian philosophy.

Smith expressly saw an important and worthy role for motives other than the appropriate self-interested behaviour (albeit mediated by the need to consider the other person’s self-interest) when transacting with ‘butchers, brewers, and bakers’. But Smith was not just interested in market transactions. He also studied the range of human interactions and in a piece hardly noticed by scholars, judging by the absence of references to it, Smith goes well beyond what qualifies for Chicago’s Home economicus, to the much under-rated virtue of ‘public service’.

Part IV, chapter I of Moral Sentiments is about the ‘appearance of Utility upon all productions of art’, and by ‘art’ Smith was not referring to art as understood today in paintings, but of its 18th century meaning of things made by people, including manufactures. This same chapter contains the more often quoted reference in Moral sentiments to ‘an invisible hand’ and it is a pity that the people eager to quote Smith on this metaphor (usually for inappropriate purposes) do not continue reading into the next paragraph (assuming they read the quotation in its place in the book, instead of extracting it second- or third-hand).

Smith described the principle of beauty in the utility of an object that is, what we might say, ‘fit for purpose’, particularly in its design being pleasing to the eye. So powerful is this sentiment that often the ‘happy contrivance of any production of art, should often be more valued, than the very end for which it is intended’ (TMS IV.I.3: pp179-80), and Smith asserted that this point has not been noticed by anybody before himself; in short, it was original to him.

It was on this ‘same principle, the same love of system, the same regard to the beauty of order, of art and contrivance’ that ‘frequently serves to recommend those institutions which tend to promote the public welfare’ (TMS IV.I.10: p 185). The famous reference to ‘an invisible hand’ appears in the previous paragraph. He then provides example of men who exert themselves ‘for the improvement of any part of public police’, which does not mean today’s activities associated with law and order, but its 18th-century meaning of the provision of opulence.

His examples are ‘public-spirited’ men who encourage the ‘mending of high roads’, or legislatures who encourage the ‘advance’ of ‘linen and woolen manufactures’ by (attention all believers in the ‘Chicago Adam Smith’!) by means of ‘premiums’ or public subsidies. He calls ‘the perfection of police, the extension of trade and manufactures’ as ‘noble and magnificent objects’, which is a far cry from laissez-faire, a maxim wrongly attributed to Smith.
And these feeling are not ‘from pure sympathy’ with consumers and ‘much less from that with the manufacturer or merchant’. ‘Public virtue’ is not implanted ‘in the breast of him who seems heedless of the interests of his country’ by ‘eloquent exhortation’, but can be implanted by describing the ‘great system of public police which procures the advantages of’ access to the ‘system’ that produces, through ‘the connexions and dependencies’ of is ‘several parts’. I(n short, the political economy of a society that produces ‘general happiness’ from its opulence.

Smith believes that a man listening ‘to a discourse of this kind’ would not feel ‘himself animated to some degree of public spirit.’ He would ‘feel some desire to remove those obstructions, and to put in motion so beautiful and so orderly a machine’, and ‘those obstructions’ include whatever inhibits people to their removal. Connect this to the duty of government to defend the commonwealth from invasions, to establish and manage a system of justice, to educate the youth, and, of prime relevance here, to provide for ‘public works and institutions for facilitating the commerce of the society’ (WN, Book V), and the role of ‘public spirited men’ takes on a crucial meaning for commercial society as Smith envisaged one. Interestingly, he ends the chapter with awarding to the ‘study of politics’ a prime role in ‘animating the public passions of men’ to ‘rouse them to seek out the means of promoting the happiness of society’.

This is a far cry from the image accorded to him of Chicago of a freak ‘laissez-faire’ individualist, a sort of Ayn Rand in trousers, who, a la Friedman, told business men to ‘keep their heads down’ and their eyes focused on profit maximization and ‘away from corporate responsibilities’. Smith understood the gross limitations of benevolence in exchange for our dinners; he also understood the harnessing of our admiration for workable societies that ensured our dinners were available each dinner in order to promote public spirited acts that helped to make society ‘valued in proportion’ as it tends’ to ‘promote the happiness of [all of] those who live’ in it.

If some people see a way to help with a little bit of altruism (the sparcity of means limits its reach), so be it; if others advocate ‘cleaning up a polluted waterway’, from which they gain nothing but admiration of a once spoilt piece of countryside, so be it; if a corporation cleans up after its, or others’, operations at cost to some of its profits, so be it; all this and much more like it is closer to the ‘insight’ of Adam Smith than the rubbish mouthed by Greko and the insensitive notions of an economy people solely by members of the imaginary tribe of Homo economicus.

Wednesday, December 27, 2006

A Stock Tipper Who Doesn't Understand Economics

From the Department of So Wrong; it’s not worthy of comment:

“While I agree with many of Stein's observations in the column, I think he may be missing one of the cardinal rules of economics: Adam Smith's invisible hand, which states that individuals create the greatest benefit for society through the selfish pursuit of personal gain.”

This was written in: ‘Ben Stein on hedge funds' by Zac Bissonnette in ‘AOL money & finance Bloggingstocks’, ( 26 December) clearly a stock tipper that must be avoided.

Tuesday, December 26, 2006

Wrong assumptions about Adam Smith Lead to Wrong Conclusions

If you start from a wrong assumption, you end with a wrong conclusion, sometimes masquerading as a complete muddle.

I found a clear example of this truth in a Blog: Civilisation Fanatics Centre, entitled:

“Adam Smith's pin factory vs. his invisible hand” by ‘WilJ’.

A few short extracts (I have quoted the relevant ideas from Wealth of Nations many times here and you may scroll back to read them, though Will J only quotes the division of labour on the pin factory and not the far more important division of labour example of the manufacture of the day labourer’s woolen coat), which I focus on his examples of the ‘contradiction’ that baffles him:

“What makes the system work is competition. All that is necessary for it to function smoothly is that everyone should be free to enter and leave the market, and change trades as often as he pleases---"perfect liberty," as Smith calls it. Intelligent self-interest will take care of the rest. People will seek to sell whatever they can at the highest price the market will bear, and buy at the lowest, and it will all balance out over time.Markets thus understood will, for the most part, be self-regulating, as a result of myriad little understandings of self-interested individuals in competition with one another. As every individual, therefore, endeavours ... to employ his capital ... so ... that its produce may be of the greatest value ... He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... [H]e intends only his own gain, and he is in this ... led by an invisible hand to promote an end which was no part of his intention. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

The problem is that the two fundamental theorems of Adam Smith lead off in quite different and ultimately contradictory directions.

These are the bifocals of Adam Smith. Through one lens, specialization (as in the Pin Factory) leads to the tendency we describe as monopolization. The rich get richer; the winner takes all; and the world gets pins, though perhaps not enough to satisfy its need for them. Through the other lens, the situation we describe as "perfect competition" prevails. The Invisible Hand presides over the situation among pinmakers (and all others).


“The problem is that the two fundamental theorems of Adam Smith lead off in quite different and ultimately contradictory directions. The Pin Factory is about falling costs and increasing returns. The Invisible Hand is about rising costs and decreasing returns. Which is the more important principle? When Paul Romer read back over the literature, he found that one of his teachers had seen the dilemma perfectly clearly as a young man. The problem is that the two fundamental theorems of Adam Smith lead off in quite different and ultimately contradictory directions


“The problem is, I don't follow his logic. I don't see any contradiction between the pin factory and the invisible hand. David Warsh is just a journalist, so I would have reason to be skeptical, except that George Stiger and Paul Romer (two major economists) also saw a contradiction.”

”On the other side of the paradox, I cannot see how the invisible hand necessarily implies diminishing returns to scale.”

and finally:

“There is no contradiction, as far as I can tell, between benefits from specialization and benefits from competition. Can anyone show me what I'm missing here?”

Read the full pirce plus comments at:

has bought the assertions of Stigler that Smith stated a ‘theory’, or ‘theorem’ even, about ‘an invisible hand’ and this ‘theorem’ (which appears to be neoclassical ‘perfect competition’) ‘contradicts’ the division of labour. From this association he finds himself trapped in a contradiction of his own( or rather George Stigler’s) making.

Fact: there is no ‘theorem’ of an invisible hand in Wealth of Nations. That is a construct built on a simple literary metaphor (again I have rehearsed the solid arguments to show this n + 1 times on Lost Legacy).

Fact: Smith did not advance the neoclassical theory of perfect competition (that came about 100 years later, out of Walras and Edgeworth’s mathematical work in search of ‘general equilibrium’ economics from their mechanical transfer of some early and now outdated mathematical models from physics).

Fact: the allusion to ‘an invisible hand’ (never ‘the invisible hand’) in Wealth of Nations was about the unintended consequences of risk aversion of merchants between investing their scarce capitals local, where they knew the people they dealt with and had confidence in the rule of law and justice versus investing it distantly abroad to import for sale locally, including in the carrying trade. He was not referring to markets, nor how they worked in Book 4, which subjects he had dealt with in Book I of Wealth of Nations.

His point was blindingly simple (so simple he did not express it other than in a literary manner):

The aggregate consequence of the actions of the individuals of which it is composed is the sum of the parts which each individual contributes to the total: if each individual maximizes his local contribution by directing all of his capital locally and not dispersing it abroad, the sum of the contributions of all those involved will be greater than otherwise. Smith’s metaphor reduces to the arithmetic whole is the sum of its arithmetic parts. Nothing more; nothing less.

WillJ gives himself a redundant contradiction in respect of Adam Smith, thanks to the fantasies of George Stigler and the Chicago Adam Smith he and his colleagues created.

Smith’s US counterpart bears little resemblance to the Kirkcaldy Adam Smith who lived just across the Firth of Forth from where I live, in a place called Edinburgh.

Sunday, December 24, 2006

Now We Have an 'Invisible Middle Finger'

I came across this piece in an incredibly boring article on convoluted incidents in some parts of the US that has something to do with real estate speculation. Its called:

“The Invisible Middle Finger” and it heads off with a definition of “Invisible Hand”:


Term used by Adam Smith to describe the natural force that guides free market capitalism through competition for scarce resources. According to Adam Smith, in a free market each participant will try to maximize self-interest, and the interaction of market participants, leading to exchange of goods and services, enables each participant to be better of than when simply producing for himself/herself. He further said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this “invisible hand” would guide market participants to trade in the most mutually beneficial manner.”


This definition and the incredibly boring obscure ‘joke’ of an article that followed were penned by an entity called the ‘Badlands Journal editorial board’ at: (warning: only read it if you are suffering from holiday-induced insomnia).

Capitalism and ‘free markets’ seldom go together, and when Smith was writing capitalism didn’t yet exist (neither did the word until 1854). And Smith never used the defined term as a ‘natural force’ guiding capitalism or competitive markets.

Each participant in any market, free or constrained, tries to better themselves (an urge that comes with us from the cradle to the grave). Unfortunately, unrestrained free markets in practice do not guide participants ‘in the most mutually beneficial manner.’ There is the little problem of monopolising practices, anti-competitive cartels, protections and prohibitions and ‘combinations’, and conspiracies against the consumers, against which Smith railed ceaselessly throughout Wealth of Nations. Basically, ‘merchants and manufacturers’ (and labour combinations) could not be trusted.

The dilemma, not solved by Smith, is that governments are not any more trustworthy than private self-interested citizens. ‘Men of system’ are dangerous, especially with power to impose their political (or religious) fantasies.

Hence Smith did not ‘further’ say that ‘no regulation of any type would be needed’. He favoured laws of justice (a severe form of regulation), he favoured the government having a monopoly of violence (eight hundred years of troublesome warlords put paid to any illusion that rivals to the state were safe when armed). He changed his mind about favouring a militia in place of a standing army, as long as the army and navy were subject to annual votes in a parliament (even one as undemocratic as the UK parliament in the 18th century) for their budgets.

He also favoured a government mint for metal money, a government post office for the mail, government assay offices and government stamping of products where quality may be diluted. He had an extensive education programme, paid in part by taxpayers, an early form of publicly funded health programme for contagious diseases, and some elementary programmes in public welfare to encourage economic activities, including substantial road, canal and bridge building programmes and publicly funded pavement building, refuse collection and lighting facilities in towns.

The definition of the ‘invisible hand’ is so wrong as to be a travesty of Smith’s views, ranking alongside the false idea that he supported laissez-faire. If it is true that ‘for the last 30 years, American economists have re-embraced Smith’s invisible hand with the fervor of rightwing religious fanatics embracing the Rapture, Armageddon and all that’, the connection between such a phenomenon and the writings of Adam Smith is, er, invisible!

That American journalists, academics and commentators (widely, and not just from the ‘rightwing’ – the ‘leftwing’ is just as credulous) believe the above about Adam Smith is unchallengeable, if the media, journals and books emanating from across the pond are read regularly. What is eminently challengeable is the whole notion that such ideas have anything to do with Adam Smith.

Duncan Foley's Fantasies Exposed by David Warsh

From David Warsh, editor of (an independent weekly: ) in an article ‘On the influence of authority of conscience, and other considerations in any economics textbook’, which reviews Duncan Foley’s, “Adam’s Fallacy: a guide to economic theology”, (reviewed an commented upon here on ‘Lost Legacy’ a couple of month’s back), I find an almost perfect statement of Adam Smith’s philosophy (I have minor quibbles, but it’s always better to be approximately right, than absolutely wrong).

Take these three paragraphs:

“Foley dwells entirely on what economists have managed to make so far of The Wealth of Nations, and gives short shrift to Smith's other book, The Theory of Moral Sentiments, and to the relationship of the one to the other. Published in 1759, seventeen years before the work for which Smith is remembered, Moral Sentiments is a compendium of much that today's economics leaves out -- declares "exogenous," in the argot of the field, "human nature" being quite beyond economists' models present-day ability to address.”

“Few among us will decide to read The Moral Sentiments on the strength of what I argue here. (Should you want a copy, though, the one to have is the beautifully produced volume from the Glasgow Edition of the Works and Correspondence of Adam Smith available at a bargain price from the
Liberty Fund.) A very pleasing alternative is The Authentic Adam Smith, a literate and brisk biography by James Buchan which conveys, in a mere145 pages, the astonishing depth and versatility of the man. The book, says Buchan, is "designed to draw Smith out of the mystifications of the economists and the simplifications of politicians and place him in view of the public."

“Buchan employs no jargon; he relates a good deal of history. And with dash and daring, he rescues Adam Smith from those, including Foley, who would appropriate him as "a sort of shady Romulus," legendary founder of an ideology. Economists are in the thrall of any number of fallacies, small and large. Some of them are downright dangerous if taken seriously. Duncan Foley alerts his readers to the worst of them. But they do not owe their existence to Adam Smith.”

It is important to remember, which Duncan Foley did not, that while 17 years separates the publication of ‘Moral Sentiments’ from ‘Wealth of Nations’ that is not how the main ideas both contain were created by Smith. He taught the moral philosophy syllabus in Glasgow from 1752-64 (his class continued until summer 1764 with the substitute lecturer teaching from his lecture notes from January), and in common with the established practice in Scottish Universities at that time, moral philosophy also included parallel lectures in jurisprudence, which incorporated lectures in political economy, and therefore, his students heard the eventual contents of both books together. We know this from whole sections of students’ notes of his Lectures in Jurisprudence (Liberty Fund) reproduced verbatim in Wealth of Nations.

These verbatim reproductions include those parts dealing with the circumstances that leads the ‘butcher, the brewer, and the baker’ to offer the customer his family’s dinner, not from benevolence, but from ‘regard to their self-interest.
Also the determination of the prices for items of dinner in both his lectures and in Wealth of Nations is exactly parallel to the resolution of conflict in Moral sentiments through the mediation of the self-interest of the parties by each having regard to the self-interest of others (‘a mercenary exchange of good offices’ in ‘Moral Sentiments’ and ‘truck, barter’ and exchange’ in ‘Wealth of Nations’).

Foley’s case for a fallacy falls at a reading of Smith’s works. In short, the basic ideas of Moral sentiments and Wealth of Nations were not separated by 17 years as their publication dates suggest. That Foley does not appear to realize this suggests his accusation of a folly on Adam’s part is wholly misdirected, which is why I have remarked that Foley’s Adam’s Fallacy actually is Foley’s Fallacy (and folly).

The errors of neoclassical economists, based on models of Homo economicus and general mathematical equilibrium models, who read their nostrums into Wealth of Nations inappropriately are not the responsibility of Adam Smith.

Note the deserved praise for James Buchan’s (also reviewed here month’s back), The Authentic Adam Smith: his life and ideas’, (its US title;
Adam Smith and the Pursuit of Liberty, UK title), undoubtedly a gem of a book on Smith, and an excellent comment by Warsh on Smith’s Theory of Moral Sentiments (Liberty Fund).

Having criticized David Warsh earlier for his account of Smith’s views in his Knowledge and the Wealth of Nations (otherwise a good read), I shall re-assess my earlier judgement and move Warsh next to James Buchan on my shelf reserved for modern writers who report Smith’s views accurately.

David Warsh's review can be found at:

From Misunderstanding Comes Forth an Opportunity

It is inevitable that the excellent work of Muhammad Yunis and the Grameen bank would excite welcome comments around the world. It is also inevitable that misunderstanding of Smith's positive views on self-interest as an important driver of behaviour would be displayed in some of those comments.

The positive effect of exhibitions of Chicago's misunderstanding is that it creates the (unintended) opportunity for corrections to be made as part of your Christian, Mithras, or Pagan (strike to suit) holiday reading.

From the Jamaica Gleaner (est. 1834) (24 December) I read:

‘Touching the poorest of the poor’ by Cedric Wilson,

“In establishing the Grameen Bank, [Muhammad] Yunus was acting in contradiction to one of the fundamental principles of neo-classical economics: It is in the pursuit of self-interest that the whole society is better off and not through acts of altruism.

Adam Smith, the father of modern economics, in describing the virtues of the market had this to say: "Every individual endeavours to employ his capital so that its produce may be of the greatest value ... And is led by an invisible hand to promote an end which is not a part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it."

Therefore, as an economist, Yunus would have known from the outset that Grameen Bank was a "bad idea". The objective of the Grameen Bank was not profit maximisation but something more elusive, more dubious: sustainability.
Beyond that, Yunus' banking operations were structured along lines that are seemingly counterintuitive - to put it mildly.

In a dominantly Moslem country, the bank accorded higher priority in lending hierarchy. Loans were given to people without collateral, and there was no provision for the use of legal means to recover loans in the event of a default.
On the surface, all of that seems like a recipe for disaster and perhaps conventional wisdom would suggest that he was simply just leaning against the wind. However, he saw good where others saw only ill; he believed that trust was more powerful than suspicion.

Today, the bank enjoys a 99 per cent repayment rate and currently has six million customers. Thousands of people's lives have been made better because they were able to access credit to start a chicken farm or purchase material to weave baskets, or some other endeavour that allows them to add value.”

Smith in the extract from the quoted passage was not ‘describing the virtues of the market’. He wasn’t discussing markets at all.

He was discussing the unintended consequences on individual motivation when faced with the differential risks of either exporting his scarce capital abroad to import foreign goods and to engage in the ‘carrying trade’ (shipping), or to invest it locally in home based activities where he could keep an eye on the venture and deal with people he knew, under laws with which he was familiar.

The consequence of his and fellow merchants’ risk aversion was that the national revenue was larger than it would be if merchants dispersed their investments across the world. In short, the national wealth (the production of ‘the necessaries, conveniences, and amusements’ of life) was the sum of its separate parts – if the parts are larger because of individual risk aversion, the sum would be larger.

Therefore, whatever neoclassical economics purports to assert, it does not follow that Adam Smith asserted in that passage that ‘it is in the pursuit of self-interest that the whole society is better off and not through acts of altruism.’ That latter argument is a different one and the distinction is important to understanding Smith’s political economy.

The unconstrained pursuit of self-interest, which in its wilder expressions, from the ‘anything goes’ school of corporate misbehaviours, it is reduced to ‘red in tooth and claw’ competition, which is about as far from Adam Smith’s moral philosophy and political economy as you can get, was not endorsed by Smith in this manner.

Self-interest promotes many different behaviours, including that of criminality (fraud, cheating, piracy, and theft), imposed externalities such as pollution, and legalised protectionism, monopolies, anti-competitive regulations, restrictive practices, slavery, forced selling, and ‘company towns’.

Self-interest can also promote the widespread mediation of competing interests through ‘truck, bartering and exchange’ propensities and the division of labour, where each party gains, not necessarily ‘equally’ from the outcomes. It was in this last form that mediated self-interest was ‘better’ (from being more reliable) than ‘benevolence’ (his famous allusion to the ‘butcher, the brewer and the baker’).

Muhammad Yunis and the Grameen bank did not ‘therefore’ act in defiance or contradiction of Adam Smith’s political economy (he may have acted in contradiction of the neoclassical economics, but then the whole of reality does that, if only its High Priests and true believers would look outside their cloistered windows and see how the world works).

‘Loans were given to people without collateral’; not quite true, if by collateral is meant secure physical assets usually preferred by bankers. The people borrowed as a group of individuals pledging to each other to repay what they borrow, and the power of those obligations made to people they know and live close to is regarded as sufficient to cover the small risk that any one of them will defect.

An acquaintance with the imperatives of ‘Prisoners Dilemma’ would assist in understanding how this minimises risks sufficient to calm the anxieties of the bank. Each person can choose to defect (‘do what is best for self’) or to co-operate (‘do what is best for all’). It comes down to trust and its necessary counterpart, risk (you can’t have one without the other). In PD, the prisoner defects because he can’t trust the other one not to do so – ‘I defect not because I want to, but because I must’. Some few defect because that is in their nature (‘I defect not because I must, but because I want to’).

Grameen found that the close social pressure of the women in each small group was sufficient, about ninety-nine times out of one hundred, for them not to defect. They borrowed the small sums and paid them back on time. They overcame the temptations of the negative aspects of the range of behaviours from self-interest, with the help of the trust exhibited by like minded neighbours.
This is exactly what Adam Smith would have expected – the impartial spectator (from whom they know what would eb wrong behaviour) and their unimpartial neighbours (who won't let them get away with defection without social costs)combine to lead to approved self-interested behaviours that benefited them and their neighbours, and, unintentionally, contribute to social harmony.

Cedric Wilson is on the right lines, but he may have done a small disservice to Smith’s legacy (though not Chicago’s version of it).


Saturday, December 23, 2006

Read Raico's Essay Over the Holiday

The Mises Blog ( publishes, as usual, an interesting weekend article, this one by Ralph Raico, ‘The European Miracle’.

What, for me, is particularly interesting about Raico’s essay is its emphasis on the ‘time dimension’ and the social-cultural context of economic growth, so often neglected – often not even mentioned – in what he calls the ‘consensus’ or neoclassical school of growth economics.

This is very much in line with Adam Smith’s historical approach to the wealth of nations. Smith, ironically, is an author much derided within the Mises School, as seen, infamously, in the rabid rants of Murray Rothbard, whose work I have criticised on Lost legacy, notably in his muddled (even abusive) misreading of Smith on the division of labour.

However, on the need for an historical approach to growth economics, I am at one with Ralph Raico, and with his editor Pete Boetkke, from whose book of edited essays this one is extracted, "The Theory of Economic Development and the 'European Miracle' ”, The Collapse of Development Planning, (The Political economy of the Austrian School), 1994, New York University Press.

Friday, December 22, 2006

Markets as Part of the Solution

The Foundation for Economic Education (FEE) publishes a daily email service with relevant stories from around the world. While not agreeing with everything it reports, I find little gems about the economic illiteracies of sections of rich world thinking.

Today’s FEE has one such gem:

“The best help for the poor is unrestricted market opportunity.
Nike Ends Labor Contract with Supplier Over Child Labor Concerns

"By severing its contract with Saga, Nike is likely to score moral points with its customers in the West. But it's also likely, observers agree, to sink Saga, a corporate giant that makes about 6 million of Pakistan's annual production of 40-million soccer balls. Saga estimates that as many as 20,000 families could be affected, since 70 percent of the local market relies on them for work." (Christian Science Monitor, Friday)


This kind of report always worries me. We want desperately to help the poor in the world to move from desperate poverty to opulence. We also have wage labour in our opulent economies much higher than in poor countries. Nike will ‘score moral points’ with the opulent families in rich countries for further reducing the living standards of thousands of already poor families in poor countries. But the rich folks won’t see that, except as famine victims when it’s too late to develop a market economy.

Development takes time. Markets are a long-term fix. Poverty is the consequence of a lack of markets. Smith expressed this clearly when he wrote about the income of the common labourer in the 18th century being higher than the income of labourers in the 17th century around the time of Charles II’s restoration, which were higher than the time of William the Conqueror in the 12th century, which, in turn, were higher than at the time when Caesar ‘visited’ Britain in 54 BC.

With globalisation we are not talking about it taking centuries to raise world living standards, but nor are we talking about decades. World markets are spreading fast enough to raise the incomes of 20,000 Pakistani families by the second or third generations. Interrupting economic growth is not part of the process.

If the ‘moral’ urge in rich, protectionist countries is to undertake development in poor countries as fast as possible, the energies of the rich moralists should be directed at reducing protectionist barriers against agricultural and manufacturing produce of the poor countries.

Nike is not part of the problem; it is part of the solution. So those with heavy moral boots should tread carefully. They could start, for example, by lifting tariffs on footwear, underwear, and such like from poor countries, which would do much to expand production facilities in poor countries and by increasing demand for labour, raise their wages and allow them to keep their jobs.

Subscribe (free) to FEE--In brief []


A Real Economist Exposes Tosh

A Blogger considers a sensitive subject about India (and other Asian countries). He has read in a newspaper that there is a 7 per cent deficit in the number of women in India. He is educated, so he asks his ‘professor’ about the deficit and the following conversation takes place:

'You take this book on economic philosophy by Adam Smith and read this, you will get the answer' he said and gave me the book.

Adam Smith told me that where there is excess of any commodity the price falls and when there is really too much available, the seller will have to pay the buyer to take the commodity away.That situation is what is causing the dowry system. Some one pays a man to take away his daughter whom he does not want and he is willing to pay money to get rid of that girl.

The solution to the problem will be to encourage the female infanticide and abortion of female fetus so that there will be an absolute shortage of women in our country. At that point, men will start paying the would be fathers in law for a wife. Woman will be treated properly and she will be in a position of strength and advantage. No woman will be beaten up, burned or murdered, because the man has paid for her, money comes before wife. Thanks to Adam Smith. We should be doing it fast.

But female infanticide will have to continue for the sake of the few women who are still alive.”

What a load of tosh.

This is what Amartya Sen, a real professor, and Nobel (Bank of Sweden) prizewinner for economics, says about this problem, which he discusses sensitively in his book, Development as Freedom, Oxford University Press, 1999, Chapter 4, pp 99-110:

Consider India, where the age-specific mortality rate for females consistently exceeds that for males until the late thirties. While the excess mortality in the childbearing age may be partly the result of maternal mortality (death rate during or just after childbirth), obviously no such explanation is possible for female disadvantage in survival in infancy and childhood. Despite occasional distressing accounts of female infanticide in India, that phenomenon, even if present, cannot do anything to explain the magnitude of extra mortality, nor its age distribution. The main culprit would seem to be the comparative neglect of female health and nutrition, especially – but not exclusively – during childhood. There is considerable direct evidence that female children are neglected in terms of health care, hospitalization and even feeding’ (p 106).

To read the tosh visit: Buhoose kanjoose at:


then read some real economics from Amartya Sen to put these, and other, development problems into perspective, and to place economic development in its proper context (as Adam Smith would have done it).

Monty Python v Adam Smith?

The International Herald Tribune, 22 December, carries a letter on Asia v Europe:

As an American living in Hong Kong, I'm astounded by the energy and commitment that Asians are investing in development. At the same time, the rush to make money has frightening consequences that will challenge this region and the world. After all, what is the cost associated with environmental destruction?
Meanwhile, the politics and economics of Europe have more to do with Monty Python than Adam Smith.

Mark Hooper, Hong Kong

Europe is a bastion of protectionism that damages the life prospects of millions of people in Africa. It is also riddled with regulations covering almost every imaginable area of economic life of millions of people in Europe.

But the ‘politics and economics of Europe’ have never had much to do with Adam Smith. Wealth of Nations is a critique of the politics and economics of Europe as Smith saw them in the mid-18th century. It has ever been thus. National State politics and Mercantile political economy – and before them, the barbarian shepherd societies, the war lord landowners, followed by feudal agriculture, the role of the Christian Church and its offshoots – all managed to have little to do with the philosophy and political economy of Adam Smith, and he was one of its severest critics.

If present-day Europe loosened its grip on the economy this would be of great benefit to the peoples of Europe and the rest of the world. To the extent that European countries have loosened their grips, their countries have flourished to a greater extent than when National Mercantile and dirigiste policies have been imposed.

Smith was seldom optimistic that Natural Liberty would be restored in Europe, but he was optimistic that even limited reforms would improve the lot of the labouring poor and would lead to opulence over the long run. And so they have. Perfect liberty is not a precondition of social progress. It certainly could speed it up, but it was not a necessary condition. If it had been a pre-condition, or absolutely necessary, Europe would still be barbarian, with living standards, life-expectancy, and absolute poverty to match.

Growth from compound interest mechanisms have done better in Europe than in the majority of the rest of the world. ‘Monty Python’ allusions are too strong; more like ‘Mildly Pathetic’ is the appropriate label, given what we know about the way markets work, if they are allowed to do so, and the evidence of history.

Read the letter:

Muddle About Adam Smith on Real Markets

In the Blog,, 21 December’, somebody writes a piece: ‘The Invisible Hand of Adam Smith’ (no credit by-line given):

“Like mainstream Libertarians, John [Stossel] has a great respect for the invisible hand of Adam Smith and the way it can produce wonderful products and markets without an obvious plan. I also respect the ability of a free marketplace to distribute goods and services and encourage growth and innovation. However, free markets almost never exist in the sense that Adam Smith probably had in mind.

John Stossel
is a lively and punchy columnist whom I have praised for some of his pieces on this Blog (passim), but I wonder if he goes so far as to anthropomorphise a metaphor!

‘[W]onderful products and markets without an obvious plan’ are not ‘produced by so-called ‘invisible hands’; they are produced by, er, markets, the human propensity to truck, barter, and exchange’ things that humans want from other humans who want something from them. Given that this propensity is prehistoric, i.e., goes back to the what Smith called the ‘rudest’ of rude societies, there is plenty of evidence supporting the notion that its consequences are not ‘miraculous’, nor ‘mysterious’, nor even ‘magical’.

The ‘free markets almost never exist in the sense that Adam Smith probably had in mind’ is a problematic statement. From the whole of the piece in it would appear that its author is discussing the neoclassical model of ‘perfect competition’, which is not quite what Smith was discussing in Wealth of Nations. In Book I Smith discusses markets as he observed them in mid-18th-century Scotland (and confirmed from markets he visited in London). These were street markets, of which there are a fair number of excellent representations in contemporary prints (I have some good ones of Edinburgh markets in the High Street at Smith’s time).

Read Book I and you will note he talks of agricultural produce on sale and how its ‘natural price’ – that which earns sufficient to pay the landowner his rent, the labour his wage, and the owner of capital (who made the necessary ‘advances’ to the labourer before the food was planted, harvested and taken to market) – may vary upwards or downwards from its ‘market’ price’ – that which is determined by excess effectual demand or excess actual supply. Where Natural Liberty obtained, owners of land, labour and capital reacted to differences between natural and market prices, or the revenues earned by them in competitive markets. If a factor did not earn its ‘natural price’, it reduced its commitment, and when it earned above its natural price it increased its commitment, to that product or switched to another, without impediments from regulations, monopoly, statutes and other interferences in Natural Liberty.

Markets in Smith’s ‘sense’, ‘free’ or ‘constrained’, were very much in his mind. That allegedly he considered them to be ‘free’ in practice is most problematical. He showed how they worked when they were ‘unfree’, how they worked when they were ‘free’ and how they worked in practice. He did not advance the idea that so-called ‘free’ markets operated and existed as some kind of norm, like the model of perfect competition purports to demonstrate. That is an abstraction. It would be more correct to have written the sentence: ‘free markets almost never exist in the sense that [the authors of neoclassical perfect competition] probably had in mind’.
The assertion that he envisaged markets on perfect competition has nothing to do with his detailed analysis in Wealth of Nations. He wrote about the imperfections of markets in the real world than the conflation of Adam Smith with Perfect Competition credits to him.

“A free market requires a lot more than simply a place to buy and sell goods. The underlying assumptions include such things as a large number of sellers such that no one seller or cooperating groups of sellers can command a significant share of sales. Similarly, the market must have a large number of independent buyers. Another condition that is often overlooked is that both the buyers and sellers must have immediate access to all relevant information about the market.”

The problem is that Smith wrote about markets as ‘simply a place to buy and sell goods’. Compared to modern markets those in the mid-18th century were primitive. Signals over vast distances were muted – it took many months to bring goods, including bullion, from overseas.

As the conditions of a free market are approximated in real life, profits decrease. Since the nature of a business is to maximize profits, a popular tool of businesses is to manipulate markets such that they are not truly free. Businesses in a free market are motivated to prevent the market from acting as it should. That is why businesses buy their competitors and obfuscate as much as possible to keep customers and their supposed friend, the government, from obtaining information which would permit smart decisions.”

Exactly! Nobody needed to tell Smith about the perfidious roles of some ‘merchants and manufacturers’ and their propensities to monopolies and anti-competitive behaviours. Book III and IV are about precisely that problem.

The muddle arises because non-readers of Smith’s books take the preference Smith had for free markets (not the recognition that they existed widely), assume the economy he wrote about was as instantaneous in its responses as implied in neoclassical models, and attribute to him the verities of perfect competition.

If the world that Smith wrote about was perfectly competitive, he would have written a different book; it wasn’t, so he didn’t.

Good Sense on Problems of Development

In The Austrian Economists (the Blog), Frederic Sautet posts (‘The US Supreme Court’) on the subject of Government acting either as a player or a referee, and refers to a paper by Pete Boettke and Chris Coyne (downloadable in PDF): ‘The Role of the Economist in Economic Development’.

The paper has to be read to be appreciated – no summary by me could do it justice – but the gist of it is about the role of economists in advising governments or the people who influence them, and whether they act as ‘Saviours’ or ‘Students’.

(Neither Pete Boettke nor Chris Coyne may agree, perhaps, with my interpretation of the world development situation that follows, but we shoot at the same target.)

Those international bodies, nominally ‘in charge’ of economic development, hire hordes of economists, almost exclusively from the neoclassical paradigm who think the same, with possible minor variants of their ‘solutions’ for economic development, all of which have failed badly, though nobody seems to mind, and almost all act as ‘saviours’, each with The ‘one true solution’.

Of course, donor governments are complicit too, being composed of opinionated politicians, each considering their pet solution is immune to contradiction, especially when mixed with large doses of ‘moral fervour’ and aspirations to confirm their tenuous occupancy of the ‘moral high ground’, which makes them vulnerable to blindness towards, or at least sophisticated toleration of, the blandishments of access to ‘famous’ (‘infamous’?) crooks, bandits and comic singers, who are lauded by UN protocols as ‘presidents’ of corrupt, cruel and incompetent member-states of that body.

Governments have the roles of either ‘Players’ or ‘Referees’. The usual unworkable combination is one of government as Players and economists as Saviours. The more appropriate workable combination is for governments to act as ‘Referees’ (rule of law, justice, and, in my view, instigating public sectors as in Smith’s Book V of Wealth of Nations) and economists to act as ‘Students’ (crudely, getting out of the hopeless prediction business and into the ‘understanding of what’s going on’ business).

Cheer yourself up this week. Read something worthy of your attention. Follow the URL and download the PDF.
The Austrian Economists (the Blog is found at:

For the downloadable paper by Pete Boettke and Chris Coyne, click to lead in the posting: ‘The Role of the Economist in Economic Development’, The Quarterly Journal of Austrian Economics, vol. 9, no. 2, Summer 2006, pp 47-68.

Dr Drummond's Students in Good (but not invisible) Hands

Accounts of markets are always interesting to economists, especially those emerging markets which are in transition from simplicity to complexity. Economic development, as in China, tracks the emergence of markets from within the statist society that was communism.

Dr Drummond provides an excellent example of the genre, reporting on his stay in BeiBei (in connection with an academic exchange visit). I quote the opening paragraphs and strongly recommend that you read the whole piece at: :

Adam Smith, generally considered to be the father of economic thought, was mystified by the operation of markets. How could they be so efficient without some sort of managerial oversight? Smith concluded that markets were coordinated by the “propensity in human nature…to truck, barter, and exchange.” That is, to engage in commerce is just as much a part of the human experience as to engage in survival or reproduction.
Each Thanksgiving we celebrate the bountiful harvest of almost 500 years ago when the first successful colonists arrived in the “new” world. As I walk the streets of Beibei [China], I frequently wonder what it looked like five thousand years ago as the early inhabitants of this river valley pursued their “propensity…to truck, barter, and exchange.” My initial guess is that not much has changed.”

What follows is fairly modern Adam Smith, without it being overtly so. When I read the first paragraph I thought it was about to burst into praise of the invisible hand fable, but my heart lifted when it raised the truly Smithian idea of ‘truck, barter and exchange’.

The closer you get to real markets with real people, and away from the abstractions of so-called general equilibrium neo-classicism, the less likely you will fall into the stupor of belief in mystical or miraculous invisible hands (which have nothing to do with Smith’s theories of markets).

Dr Drummond’s students are in good hands.


Thursday, December 21, 2006

Marxist Myopia versus Adam Smith's Optimism

While involuntarily disconnected (a hapless state not recommended for regular bloggers – in fact it is ‘blogging awful’), I came across a highly serious blog, dedicated to what it calls ‘sound proletarian science’, a wholly new notion in the annals of science as science. It will not surprise readers to know that ‘What in the Hell…’, for that is its name, is thoroughly Marxist in orientation, probably deserving of the appellation, ‘intellectual’, as well as ‘deadly serious’, as compared to the usual Marxist rants we get from people loosely acquainted with well-known third-hand quotations, rather than the serious study of the most obscure transcripts of Marx and with a working knowledge of the German that he wrote them in (you also have to be good at reading Marx’s handwriting).

You can find “What in the Hell…” at:

This paragraph from it is relevant to Lost Legacy (the rest is also interesting in that mood of ‘if I had the time I would learn something, but …):

“In his 1844 Manuscripts, Marx quotes Adam Smith noting that competition for wages often served to “reduce the wages of labor to what was barely sufficient to keep up the number of laborers.” [Smith I, p. 84] Marx adds, making the point more clearly: “The surplus population would have to die.”

Marx also quotes Eugene Buret, “Labor is life, and if life is not exchanged every day for food, it suffers and soon perishes. If human life is to be regarded as a commodity, we are forced to admit slavery.” [ Eugene Buret, p. 49-50 ] and “The large industrial towns would quickly lose their population of workers if they did not all the time receive a continual stream of healthy people and fresh blood from the surrounding country areas.” This latter quote suggests that Marx’s beloved metaphor of capital as a vampire can be construed not as simply a rhetorical flourish but also as a comment on the biopolitical nature of the capital relation as such. Buret also describes capitalism as a “war of conquest” (20). Marx adds that “political economy knows the worker only as a beast of burden, as an animal reduced to the minimum bodily needs.” This reduction of the body to its minimum for survival is precisely bare life: thinking of the proletariat as proletariat, as bare life, leads to the production of the proletariat as materially existing bare life, life on the edge of death. It is no surprise that Marx refers to the proletariat being treated as a beast, for animalization - based on the separation of humans from other animals - is an old mechanism for treating some bodies as bare life.”

Note the disembodied use of ‘political economy knows’, a habit among intellectual Marxists, who often use the word ‘capital’ as if ‘it’ has a conscious purpose separate from the people (‘zombies’?) who own it; Smith’s ‘capital stock’ has come ‘alive’ and is free from the mysterious and magic ‘lamp’; ‘globalisation’ is ‘alive’ and humans have become ‘its’ slaves, etc.

I quoted the second paragraph to convey the theme of the entire piece, specifically that weird forces (unfortunately only understood by inductees into Marxism) set out to become all powerful, by destroying the right-less and dispossessed proletariat, torn from the common land farms (visions of hardworking but happy families, dancing round maypoles, swapping philosophical thoughts about the meaning of life, and eating their fill of the products of their labour) and driven into factories and mills by grasping vampire capitalists, and when no longer fit for purpose are spewed out as shrunken, fleshless skeletons, by the uncaring weird forces who rule them.

The extract from Eugene Buret envisages the cycle of hearty proletarians to their early deaths as ‘slaves’, is sustainable only if there is ‘a continual stream of healthy people and fresh blood from the surrounding country areas’. That the industrialization process also accompanied an historically high rapid growth in population seems to eliminate Buret’s fanciful rhetoric and Marx’s elaboration of the same theme.

Looking outside our windows now and again is good for philosophers. Marx has an excuse (he saw what he believed he saw; or more correctly, only imagined what he wanted to believe), but what excuse has the author of ‘What the Hell…’ got when he, or she, sees the ‘working class’ around them living in a degree of opulence beyond the imaginations of Marx and Adam Smith?

Smith’s ‘subsistence’ level of wages (determined by circumstances and custom, not the biological minimum, but by that ‘which is consistent with common humanity’, Wealth of Nations, I.viii.15: p 86) became in Marx’s mind the biological minimum in the ‘vampire’ economy of capitalism (a 19th century word, first used in 1854, and then with monotonous regularity in Marx’s ‘Capital’).

In Marx’s, and his epigones’ imaginations, the immiseration of the working class was inevitable in all its gory details; yet while ‘capitalist’ proletariats flourished under the regimes of rising real wages, the hell envisaged by Karl Marx came to its terminal destination only in the thirty-year history of the concentration camps of Soviet Socialist Russia (and, for a shorter while, in Nazi National Socialist Germany).

Smith had a far more optimistic view of the affects of markets on living standards, especially for the labouring poor and their families) than is justified by Marx (and Marxists) hijacking his name to provide intellectual comforts for absolutely wrong predictions about the future of ‘capitalism’ (a word and a phenomena that Smith knew nothing about in mid-18th century Scotland).

The history of markets under the capitalist mode of production confirms Smith’s optimism.

‘What the Hell’ does that say about Marx’s confident and absolutely wrong predictions?


Wednesday, December 20, 2006

Reconnected at Last!

Hurray! Hurray!

Reconnected at last. It's been a week since I was able to access my Blogger account because Mr Google was managing a transition or something.

Pity he didn't tell me what he was doing (if Mrs Blogger had been running things, or the part that I use, this would never have happened without advance warning and post-switching information.

However, normal Lost Legacy servies will now resume, in between grading 250 MBA/MSc examination scripts for my previous day job.


Monday, December 18, 2006








Friday, December 15, 2006

Boudreaux on ‘Invisible Hands’

My admiration of, and respect for Don Boudreau, is well-known to readers, but that does not prevent me questioning his statements when I believe that they warrant it.

In a short piece for popular consumption, ‘Spontaneous Order and Law’ in Pittsburgh Tribune-Review, he informs his readers of some elementary principles of law, of how laws evolved by people adopting ad hoc informal ‘rules’ of behaviour towards each other, which when they become general because they work, by reducing disputes, tend to be formed into mandatory codes, backed, later, by official enforcement.

For a first class in ‘spontaneous order’ (after Hayek) Boudreaux’s article is just right. The attention span of the audience precludes strict adherence to unambiguous criteria, but the gist of it is just fine.

However, he kicks off the first paragraph with:

“Adam Smith famously observed that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Smith explained how self-interested behavior by each person in a private-property-rights environment combines with the self-interested actions of others to bring about a peaceful, productive and complex economy that no one designed. This economy is the result of what Smith called "the invisible hand."


Without the last sentence it would be still be correct; including it I find it problematic. Smith never called an economy the ‘result’ of ‘the invisible hand’. Minor quibble, but indicative; Smith only mentioned twice about ‘an invisible hand’ twice, first as a metaphor for unintended consequences of individuals (unpleasant rich people, as John Pratt puts it) whose ‘natural meanness and rapacity’ is curbed by the minimal subsistence that keeps a population multiplying (Moral Sentiments, IV.1.10: p 184) and second for the risk aversion of traders preferring to trade locally and not abroad, which concentrates their capital accumulation domestically and enables the national interest (domestic wealth, or, today, GDP), to grow faster than it would if their capital necessarily was spread thinner, or what amounts to the arithmetic of the ‘larger whole is the sum of its larger parts’.

He was not referring to markets on either occasion. To suggest that he did, gives credit to the ‘Chicago Adam Smith’, neo-classical to the core, who has little in common with the Adam Smith of Kirkcaldy, who wrote Moral Sentiments and Wealth of Nations.

Smith had a social-evolutionary method of analysis that began with the origins of phenomena, like language, morals, political economy, forms of government and law (the negative virtue of justice), and used it to show the ‘connecting links’ of disparate phenomena (from his ‘History of Astronomy’. His theory of how economies evolved and work is in his analysis, and not in a metaphor.

On the first occasion, in ‘Moral Sentiments’ (TMS IV.I.10.10: p 184-5), he states that if rich landlords wish to extract each year from the harvests sufficient product to trade to acquire ‘trinkets of frivolous utility’, then it is necessary for them to distribute sufficient subsistence to their retainers and serfs to maintain themselves and their families at a minimum level consistent with the multiplication of the species and their capacities for labour. If they do that they will discover that mortality will decline, and serfs and retainers will produce insufficient children to replace deaths among adults, and labour will be beyond them.

Now, as this minimal condition obtained in ‘Rude’ society (before the earth was subjected to the division into properties), it follows that the distribution of subsistence by rich land owners to pay for their retainers and serfs’ productive efforts would at least equal the situation obtaining in such an arrangement, when everybody had equal portions of land. If it didn’t, such a society would experience real decline.

In short, the base-line subsistence level operates in all societies, all four Ages of Man: if the population is not fed, clothed and sheltered by its mode of production it declines below the reproduction rate and becomes to weak to work; if its mode of production raises subsistence output, it achieves or exceeds it reproduction rate, and labourers are able to work.

To use a metaphor to describe this ‘iron law’ as its participants are being ‘led by an invisible hand’, adds nothing to the sense of his examples, not does it detract from them (providing that metaphor is appropriate, is not forced, is self-consistent and has its own ‘beauty’; see Adam Smith, 1762: Lecturers in Rhetoric and Belles Lettres’, Lecture 6, Liberty Fund, 1985). Converting the metaphor into what it was not is misleading.

Monday, December 11, 2006

Adam Smith on Self-Interest and Laissez-Faire

The public image of corporations is not good in general, partly due to the prejudice against corporate capitalism in the media spewed out bluntly and sometimes subtly, including from Hollywood and tv script writers, plus a clutch of novelists, with their pathological, near unanimous, prejudice against cardboard characters ‘doing their evil things for profit’, with ‘their evil things’ meaning anything scurrilous, underhand, or criminal, that the main actor is opposed to or the people he represents are victims of, and which the scripts goad the watchers or readers to sympathise with. It’s also partly to do with the behaviour of some corporate capitalists in the matter of being anti-competitive, given to trade protection and the well documented history of environmental damage by ‘dirty’ industries.

An editorial in today’s Daily Telegraph (UK) discusses public perceptions of corporate capitalists:

“In truth, Monsanto, like other companies, is neither good nor wicked. It has contributed greatly to the sum of human happiness by, for example, creating strains of crop that do not require pesticides and whose increased yields fill hungry mouths. Yet it has done so, to paraphrase Adam Smith, not from benevolence, but from regard to its self-interest. This same self-interest makes companies reluctant to poison their clients. They hire scientists such as Sir Richard partly to ensure that their products are not toxic. True, they sometimes fund tendentious research; but so do green pressure groups, government agencies and UN bodies, all of which have a vested interest in frightening the rest of us so as to keep their funds flowing — an interest that they, too, often fail to declare. There are, in short, few wholly disinterested parties. But, as long as businesses need customers, they will try to behave. Sir Richard and Monsanto are as entitled to the presumption of innocence as anyone else.”


I chose these paragraphs because they bring out an important dimension of self-interest: it can lead to benign or malign (or some combination of both). Too often the distinction slips from acknowledgement of possible variations in outcomes, especially at the aggregate level. Smith discussed in Book IV how individual self-interest could in aggregate benefit society. His illustration was the case of individual merchants whose motives led them to prefer to invest in domestic and local markets as opposed to sending their capital out of sight to foreign countries and distant parts. Despite their lack of interest in societies’ gains, their self-interested actions benefit society. Smith wrapped this process in the metaphor of ‘an invisible hand’.
It is widely believed, and preached, that self-interest necessarily benefits society, though that is not what Smith concluded. Self-interest may benefit wider society, but it may not. Those who believe this error smuggle in (unintentionally) that the individual’s (now the corporation’s) self-interest is always benign.

‘Leave them alone’ translates as ‘laissez-faire’, which is another widely held view in the environs of Chicago University that is attributed to Adam Smith. That Smith never used this phrase is ignored, though he knew and corresponded with French economists who used the phrase. He chose not to use it because he could see its weakness an extreme condition.

Wealth of Nations is replete with instances of where the self-interests of 'merchants and manufacturers’ led them to operate under Guild restrictions, the apprenticeship statutes, various monopoly prices, international trade protection tariffs, quotas and restrictions, and ‘combinations’ of employers to cut wages and resist increases. Adam Smith’s name is often bandied about in support of these self-interested policies, which is a travesty of his true legacy.

Of course, not all corporations, nor all individuals, operate in such an anti-social manner. The issue for economists is whether the self-interests of merchants and manufacturers lead to individual actions that are mainly beneficial for society. Can we generalise from the example given in Book IV of when individual actions do benefit society, namely when local trading leads to higher national output, or the whole is the sum of its parts. Intentions drive individuals which could be beneficial, but they could also be less than optimal in that intentions could result in other sets of outcomes besides being wholly beneficial to society at large. Forgetting this distinction is fatal to the attribution of universal benign outcomes to any and all actions. It is the outcome that decides the beneficence of actions (intentional or unintentional). Individuals and corporations cannot safely be ‘left alone’ across all possible sets of their behaviours. But nor must it be inevitable that a modern society would ‘solve’ this problem by going to the other extreme of total intervention in the daily, hourly, affairs of a business.

Society does and should set down the ‘rules’ by which individual and corporations must operate; it’s called law and justice. Smith outlines many examples of malign self-interest, particular under Mercantile political economy in Book IV. He included among his antidotes to malign self-interest the institution of competition, a natural phenomenon that evolved socially over many millennia. Monopoly practices exist under the protection of the law and he favoured their abolition, believing that competition prevents the appearance of monopolies and cartels. He favoured the abolition of trade restriction, the sweeping away of the Statutes of Apprenticeship and the Acts of Settlement (18th century problems), and the privileges of the Guild corporations.

He advised on the benefits of frugality over prodigality, productive over non-productive labour, the avoidance of foreign wars, gradual withdrawal from defence expenditures in the American colonies, and the restraining of national expenditures to bring them into line with the ‘mediocrity of [Britain’s] mediocrity’ (something not yet learned in the 21st century.
He advised of the need to use public funds for the education of children, for the palliation of dangerous diseases, for the funding of public works that befitted commerce, and the setting of ‘quality’ standards, running a national mint. He also advised on the appropriate rules for spreading the burden of taxation. Overall these measures, he favoured the separation of powers, the independence of the judiciary and a system of justice, and the prudent practice of virtues that encouraged harmonious societal relations.

All these items, and more, are contained in Moral Sentiments, Lectures on Jurisprudence, and Wealth of Nations. They are incompatible with attributing to Smith misleading notions of uninhibited reign to individual self-interest (let alone the notions of selfishness and greed) and laissez-faire. Adam Smith’s philosophy and political economy has far more nuance within them than Chicago has taught its students.

Sunday, December 10, 2006

Adam Smith on Utility, Principles of Motivation and the Promotion of the Public Welfare

Recent correspondence with John Pratt prompted me to take a closer look at Moral Sentiments, Part IV: ‘Of the Effect of Utility upon the Sentiment of Approbation’; Chapter I, ‘Of the beauty which the appearance of utility bestows upon all the production of art, and of the extensive influence of this species of beauty’ (TMS IV.I.1-11: pp 179-87).

Smith acknowledges the wide recognition of utility as a ‘principal’ source of beauty, specifically citing David Hume as defining the ‘utility of any object … pleases the master by perpetually suggesting to him the pleasure of conveniency which it is fitted to promote.’ Smith notes with undisguised pleasure that the ‘happy contrivance of any production of art, should often be more valued, than the very end for which it is unintended’ had not been noted by anybody else before him, and from this he develops an important principle – people are more interested in ‘the perfection of the machine that serves to attain’ some end more than they are interested in the end itself. Which he returns to towards the end of this chapter.

An untidy room, a watch that runs slow, and ‘trinkets and baubles’ of frivolous utility but which are ‘apt to promote it’ (and which look and feel good) promote activity to change or acquire them, even at inordinate expense or effort. And conduct is influenced by ‘this principle’ (fitness for purpose) in trivial pursuits and those ‘important pursuits of both private and public life’.

In illustration of the effort expended to acquire expensive items, when cheaper items are available or expensive ones could be done without, Smith makes his famous charge against the ‘poor man’s son, whom heaven in its anger has visited with ambition’, which causes him to devote himself ‘for ever to the pursuit of wealth and greatness’ and to sacrifice the ‘real tranquillity that is at all times in his power’. The rich are admired not so much for their ‘superior ease or pleasure which they are supposed to enjoy’ as their possession of ‘numberless artificial and elegant contrivances for promoting this ease or pleasure.’ Nobody imagines that the rich as really happier than others, but they do imagine ‘that they possess more means of happiness.’

Power and riches are ‘enormous and operose machines contrived to produce a few trifling conveniences to the body’ and in his rather melancholy elaboration of this theme he concludes that it as ‘splenetic philosophy’. However, in happier times ‘of ease and prosperity’ it is transformed into admiration of the beauty of ‘the palaces and economy of the great’ because everything in them is ‘adapted to promote their ease, to prevent their wants, to gratify their wishes, and to amuse and entertain their most frivolous desires.’

These contrasting perspectives run right through society, reaching all levels, and while Smith lays into the imaginations of the poor about the splendours of the rich and about striving to emulate their possession of frivolous contrivances, he turns the direction of this argument. For society’s sake it is well that these ‘deceptions’ are widespread, because they ‘rouse and keep in motion the industry of mankind’.

‘It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and the arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests into agreeable and fertile plains, and make the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth.’ (TMS IV.i.10: p 183-4)

Smith makes an important point following this statement about the ‘proud and unfeeling landlord’ who views his extensive fields without a thought for the wants of his brethren. We can almost hear him when looking at his fields and the harvest growing on them and thinking: ‘Mine! All mine.’ Yet he could not consume anything near what he sees before him because ‘the capacity of his stomach bears no proportion to the immensity of his desires’. He has no choice but to distribute the surplus in some manner. And Smith identifies what a rich landlord must do because he can do no other.

He must distribute from the surplus to:

a) those who prepare ‘in the nicest manner’ that ‘little which he himself makes use of’;
b) those of ‘fit up the palace in which this little is to be consumed’;
c) those ‘who provide and keep in order all the baubles and trinkets which are employed in the œconomy of greatness’;
d) those who ‘derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice’.

This last group are not just the largest numerically, but are of particular interest to Smith’s political economy, namely the labourers who toil in the landlord’s fields for their subsistence. The landlord’s ‘natural selfishness and rapacity’ serves his own ‘conveniency’ and the ‘gratification’ of this own ‘vain and insatiable desires’; he doesn’t undertake labour on his farms, he hires others to do that for him (or rents fields to tenants who deliver the bulk of the produce to the landlord in return for keeping a small share). In either manner, the labourer’s subsistence is maintained by the produce of the land.

Smith makes his famous assertion: The landlords ‘are led by an invisible hand to make nearly the same distribution of the necessities of life, which would have been made, had the earth been divided into equal portions among its inhabitants, and thus without intending it, without knowing it, advance the interests of the society, and afford the means to the multiplication of the species.’

The metaphor of ‘an invisible hand’ has been given a number of meanings since the end of the early 20th century, particularly within the neo-classical paradigm where it has become described widely as his ‘theory’ of markets, but also by those who detect a religious strain in Smith’s language throughout Moral Sentiments (less so in Wealth of Nations) and purport that Smith was, if not a Christian, at least a Deist. The latter is a meaning I shall leave aside on this occasion, as its refutation would take us well way from my main critique.

Let me address Smith’s assertion that landlords ‘make nearly the same distribution of the necessaries of life’ as ‘would have been made, had the earth been divided into equal portions among all its inhabitants.’ First, taking the historical view, in Smith’s Four Stages theory, private property in land emerged during the Ages of Hunting and Shepherding and then superseded them in Europe (I ignore variations of the progression to agriculture associated with the ‘hydraulic’ societies of Egypt, Babylon, India and China). Private property was inextricably bound up with agriculture; open fields exposed to human traffic and to wandering flocks and herds would prove too troublesome (as the Biblical Cain and Abel demonstrate in Genesis).

Property is not incompatible with equal portions, and is more likely to be associated with ‘open’ territories, into which aspirant farmers can move at least up to the capacity of the land. Setting aside the political, legislative and governance characteristics that led to unequal divisions, one clear instigator of landed inequality would be a population rising beyond the output capacity of the territory. Indeed, unless agriculture increased annual output over hunting and shepherding it would not be sustainable; neither would its rising population levels. Unless there is a surplus of subsistence, population densities remain low.

Minimal subsistence, defined in some manner related to the reproduction of the population, sets the base below which it cannot drop without a decline in population. Private property in land is viable if it raises output above alternative modes of production. But for it to be viable, and associated with rising population, per capita consumption has to be at least at the subsistence level. Therefore, Smith’s assertion that private landlords divide their produce ‘very nearly the same’ as ‘would have been made had the earth been divided into equal portions among all the inhabitants’ is not all that challenging, or exceptional, or, for that matter, surprising.

The ‘unfeeling’ landlord is not ‘led by an invisible hand’ in the sense that there is something mysterious or ‘miraculous’ driving him to act in a manner that he does; he is led by a necessity that keeps the ‘operose machines’ of the mode of production working, for without labourers to undertake the labour of farming and herding in production, and without his armed retainers to defend his property rights against all comers, rich and poor or foreign invaders alike, all of his ambitions for his personal ‘vain and insatiable desires’ would be frustrated within a season or two when below subsistence consumption levels took their toll and reproduction rates fell below the levels that multiplied the species. As the whole is the sum of its parts, neglecting the minimal subsistence of the parts, in due course, would be terminal for his ‘greatness and riches’.

Those who seek ‘greatness and riches’, which they do from the principle of ‘beauty’ that pleases the eye and the imagination in the ‘fitness for purpose’ of the ‘numberless artificial and elegant’ appurtenances and contrivances, are the main drivers of society. This is Smith’s original principle of how utility is less important as a driver than its ‘beauty’ (a hovel and a palace provide the same utility i.e., shelter from the elements, but the ‘fitness for purpose’ of the latter gets aspirants out of bed each morning to seek ways of acquiring the means to its beauty).

Smith writes, in a passage drawn to my attention by John Pratt (which has not received the attention it deserves among scholars):

‘The same principle, the same love of system, the same regard to the beauty of order, or art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare’ (TMS IV.1.11: p 185).

John considers that ‘the same principle’ is the ‘invisible hand’; I do not give a metaphor that level of credit. It is neither a ‘theory’, nor a ‘principle’; at least to Smith it wasn’t either. An ‘invisible hand’ by definition or by allusion cannot possibly ‘frequently serve[s] to recommend’ anything. It would have to be embodied in some way into the consciousness of a human actor for it to ‘recommend’ something. Has the invisible hand also acquired a ‘silent voice’, a sort of extension of the role of Smith’s ‘impartial spectator’?

However, John Pratt’s more important point is in the rest of what is contained in paragraph 11, to which I am most impressed and grateful for him drawing it to my attention. My own working copy of Moral Sentiments has long been heavily underlined for much of paragraph 11, but I never noticed its fuller significance before.

Smith is often ‘credited’ with strong opposition to the role of government in the economy. More accurately, he is often claimed to have been hostile to government intervention, favouring some version of a ‘night watchman state’. I think there is an abundance of evidence in Wealth of Nations to refute the extremer versions of that claim. However, the particular paragraph in Moral Sentiments quoted from above puts a different slant on his alleged views on public intervention and on the conscious support for courses of action disconnected from self-interest.

Smith lists examples of ‘the same principle, the same love of system’, etc:

a) ‘a patriot’ who ‘exerts himself for the improvement of police’ (in Smith’s days this meant: ‘public cleanlyness of the roads, streets, etc; 2d, security; and thirdly, cheapness or plenty’ of provisions, etc. (Lectures in Jurisprudence, vi.1: p 331). His ‘conduct does not always arise from pure sympathy with those who are to reap the benefit of it’;
b) a ‘public-spirited man encourages the mending of high roads’ but ‘not commonly from a fellow-feeling with carriers and waggoners’;
c) a ‘legislature establishes premiums and other encouragements to advance the linen and woollen manufacturers’; its ‘conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less with the manufacturer or merchant’.

Sympathy for those benefited or affected by these public-spirited proposals is not necessary; so what causes these people to act in a public spirited manner? There is no conceivable manner in which ‘an invisible hand’ could be at work in these cases (that really would be to introduce detailed divine guidance in the affairs of humans), and it is not Smith’s invisible ‘principle’ at work. The metaphor is not needed because he explains precisely what is at work, and precisely to which principle he refers.

The ‘perfection of police, the extension of trade and manufactures, are noble and magnificent objects’ and the ‘contemplation of them pleases us, and we are interested in whatever can tend to advance them.’ Why? Because they ‘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.’ This links to Smith’s beginning of the chapter.

He writes: ‘We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can at least disturb or encumber the regularity of its motions’ (fitness for purpose!). We value all constitutions of government ‘only in proportion as they tend to promote the happiness of those who live under them.’ Indeed, this is their ‘sole use and end’. And he returns to his claimed originality at the head of the chapter: from a ‘certain spirit of system’, from a ‘certain love of art and contrivance’ we ‘sometimes value the means more than the end’. What could be clearer? This is the ‘same principle’ he opens the chapter with.

The oft-quoted apparent rebuttal of public spirit in Wealth of Nations is put into its proper context by Moral sentiments, namely where he reports (in the same paragraph where he makes the sole reference in that book to ‘an invisible hand’) that ‘I have never known much good done by those who affected to trade for the publick good. In it is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it’ (WN IV.ii.9: p 456). Indeed, not. Traders do not necessarily, or need, concern themselves with the public good, but others do concern themselves with the ‘beauty’ of the market machine – hyper fit for purpose. A bustling market place in a town on market day is a wonderful and colourful sight; a windswept, damp, empty market with a few desultory people shuffling about is depressing. Discussions about how to improve market day events are bound to feature among the city managers (and other public spirited citizens).

He ends the chapter with comments on how to persuade (and how not to persuade) someone to awaken his industry and passion for improvement. It is not about the ‘happiness of the rich’ and the ‘superior advantages’ of a well governed state. Far better to relate to him the ‘conveniency and arrangement’ of the different apartments of the palaces of the rich, their ‘equipage’ and the number and purpose of their servants, and how the ‘great system of public police’ procures advantages through the ‘connexions and dependencies of its several parts, their mutual subordination to one another and their general subserviency to the happiness of the society.’

Interestingly, from what we know of his antipathies about politicians, he asserts that nothing ‘tends so much as to promote public spirit as the study of politics’ and that ‘political dispositions, if just, and reasonable, and practicable, are of all works of speculation the most useful’, and that even the ‘weakest and worst of them’ serve ‘at least to animate the public passions of men, and rouse them to seek out the means of promoting the happiness of the society’. He certainly spent a lifetime seeking to persuade legislators and politicians, or at least some of them, about the efficacy of his recommendations. To what extent his remedies were ‘just’, ‘reasonable’, and ‘practicable’ is the subject of a wider debate.