Tuesday, May 29, 2007

Watching the Watchers Muddle Adam Smith's Economics, Part two

Watching the Watchers: “The Wealth of Nations Revisited; It All Descends from Adam
By Lee RussPart Two
(see earlier post below).

It was intended to apply under certain conditions and certain conditions only

In the case of Adam Smith this statement is not true. David Ricardo was the analytical economist, not Smith. Any acquaintance with these authors shows a deep difference in their theorising. Smith was not an analytical economist; he was primarily a moral philosopher, who included political economy in his philosophy courses while he taught at Glasgow University. His approach was an historical, looking backwards, long view of how anything he was studying originated, be it philosophy, astronomy, languages, moral sentiments, jurisprudence, ‘police’ (i.e., the provision of subsistence to a society), also known as political economy.

He is best known for the latter book, the Wealth Of Nations, which many casual readers treat as a normal economics textbook. It wasn’t a textbook nor was it meant to be. Its full title, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, says it all.

It was his report of his 12-year inquiry into how the British economy worked and how it got to where it was from where it came. It looks back to the situation in Western Europe following the fall of Rome in 476 and how it entered a thousand-year long interregnum under the rule of war-lords and feudal monarchs, when Europe regressed to an agricultural society and per capita incomes stood still at the pre-Roman level.

Smith treated the re-born commercial society as it was, which he described as 'mercantile commence’, but he did not discuss pre-conditions ‘under certain conditions and certain conditions only’ etc. His model, such as he had one, was set against an ideal that did not exist, known as ‘Perfect Liberty’, and which he states very clearly it would be ‘utopian’ to ever think it would exist. To confuse these two concepts, economic society as it was in mid-18th century Britain and how the monopoly, protectionist policies of mercantile commerce, is unfortunate.

The four conditions Lee Russ stated in his piece do not relate at all to Adam Smith. The quotation that follows with the famous invisible hand metaphor, is from a discussion Smith is undertaking about the natural risk-aversion of merchants to sending their capital out of their sight to distant places including foreign countries. Hence, their insecurity causes them to invest locally. By doing so, their capital grows locally and thereby the national capital grows faster than it would have if they sent part of their capital abroad. This is otherwise known as the ‘whole is the sum of the parts’. Nothing more, nothing less and nothing invisible in it. The invisible hand was a metaphor for those who couldn't see how the whole was the sum of its parts.

The three statements allegedly ‘not realised’ by anybody are defective.

· “Smith was deeply religious, and believed that God Himself had endowed human beings with such character that they would produce good simply by following their self interest?
· Smith described a world in which most business, especially domestic business, was not corporate, but sole proprietors, with no distance between ownership and management, and no means of limiting the personal liability of the owner?
· Smith described a world in which it was quite difficult for capital to travel from one nation to another, and barriers of physical distance virtually precluded the import of goods and services which were already available locally?”

Smith was not ‘deeply religious’. Far from it. He went to Oxford University to study for his MA and to prepare for ordination into the Church of England as a Minister in the Episcopalian Church of Scotland. He left before he took the ordination course and dropped the plans of his religious mother for a church career. Like all other men in Scotland at the time he worked under the tutelage of the zealots, a sort of ‘Taliban’ wing of the Church of Scotland, then the dominant religion in Scotland.

He was always careful to conform to the necessary public obligations, but it went no further. After his very religious mother died in 1784, who lived with him, he dropped several overly religious sentences in Moral Sentiments. He did other things too, but space precludes elaboration.

‘Copartnery’ and ‘joint stock companies’ appeared as capital requirements grew. He criticised chartered joint stock companies because of their monopoly status, granted by the King or Act of Parliament, but he also saw a role for joint stock companies without monopoly charters (Bank of England, Bank of Scotland, Royal Bank of Scotland).

Normal commerce did not need vast capitals to fucntion at that time, but canals and water supplies did, and he acknowledged they could be a role in large capital projects or high risk insurance business for joint stock companies (without monopoly charters). Neither he, nor anybody else, knew about capitalism.

The reference to ‘it was quite difficult for capital to travel from one nation to another’ is not quite the case (more a concern for Ricardo’s theories than Smith’s). Smith acknowledged that merchants owed by their conduct allegiance to no country and could and did move their capital at will – ships bringing gold bullion to and from Britain and other countries weekly did so, and paper bills of trade travelled great distances in an early form of international credit.

In sum, the economics attributed by Lee to Smith are tenuous. The case made by Lee Russ is not sound.


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