A Korean Economist Misreads Adam Smith, as did Alexander Hamilton (and Frederic List)

Ha-Joon Chang’s new book, ‘Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism’ (Random House, UK; to be published in the US in December) is reviewed in The Economist (UK), and as is usual with the Economist, the review is written anonymously under the heading: ‘Pistols at dawn’.

It’s opening paragraph reveals the kind of misunderstanding that dog modern authors (and a few 19th century authors, such as Frederic List) about British national trade policy and the writings of Adam Smith.

‘In [Alexander Hamilton’s] 1791 “Report on the Subject of Manufactures”, he quarrelled with the free-trade doctrines of Adam Smith and other liberal economists. He believed the government should shelter and nurse American industry through its infancy until it was strong enough to stand against Britain's manufacturing might. Critics of free trade have reached for this “infant industry” argument ever since.’

The German, Frederic List, like South Korean, Ha-Joon Chang, have confused what Adam Smith advocated in his critique of mercantile political economy with what British mercantile governments were doing in that period before the mid-19th century years.

Alexander Hamilton was clear that Adam Smith’s advocacy of ‘free trade’ had been, was, and continued to be, largely ignored by British governments for all kinds of reasons. Convincing a Prime Minister of the potential benefits of free trade was not the same by a long way of convincing the legislature (upon which prime ministers relied for their parliamentary majorities), which was largely in thrall to the ‘sophistry’ of ‘merchants and manufacturers’ and the larger power base of the farming interests.

Hamilton’s call in 1791 (Smith had died the previous year) to stand against ‘Britain's manufacturing might’ was not an appropriate description of British manufacturing strength so much as a description of Britain’s long held (since the 15th century) mercantile policy that had dominated its American colonies through an imposed monopoly of American trade.

The colonies were not permitted to develop local manufacturing activities and had to import everything of that nature from England (and after 1707, from Britain) and had to export everything it produced to Britain, which would re-export some of it to Europe. From an American point of view, it is no wonder that people like Hamilton confused the doctrine of Adam Smith, which were not pursued by British governments in practice, and the mercantile policies of monopolies, trade restrictions and colonies that were.

Ha-Joon Chang appears to have confused actual history with the myths of that history as taught in US (and presumably Korean) universities. Like List before him, Chang develops a hostile political economy in the mercantile tradition. List, a German nationalist, had visited America in the 1830, and was much influenced by Alexander Hamilton’s 1791 paper and the policies that followed from it.

List’s main work, A National System of Political Economy (1857) is a critique of Adam Smith’s Wealth Of Nations mixed with a critique of British national economic policy, as if the two were synonymous. They were not, and still are not.
Smith favoured unilateral tariff reduction and their eventual abolition to undo the mercantile distortions imposed on the British economy, largely at the expense of growth and the continuation of the poverty of the British poorer majority. He saw growth as the route to opulence for the poorer majority through employment and rising incomes. His unilateral policy was constrained by the necessity to unpick the mercantile monopolies to minimise further suffering of those least able to adjust quickly. But the goal was clear enough.

Those readers of Wealth Of Nations today will know of his sympathy with the British colonists in America who wanted to be independent, because the ending of British rule over North America would force the British economy to re-adjust it economy to domestic economic development, unprotected by mercantile colonial monopolies. However, that was not to be because further distortions in British domestic growth continued, first in the long wars with France and the continuation of the abomination of the East India Company, which led to imperialism and further colonies. Like the first Empire, the second Empire wasted much blood and treasure on the same fantasy as the first, for no gainful ends.

To lay all these errors, and deceit, at Adam Smith’s door is an even worse error, as it traduces a writer who saw clearly what was needed for balanced economic development, but who was in fact hardly listened to in the form of the adoption of his free trade policies.

There is an omnious linkage from Alexander Hamilton to Frederic List and now to Ha-Joon Chang. All represent a retrograde step in trade policy and development. The British experience under nationalist mercantile policies, and its human cost, let alone its economic cost, does not suggest it is worth following.

Adam Smith did not advocate that Britain should do so; I doubt if we should welcome a Korean version.

Roll UP. Get Your Wealth Of Nations Soon

Greg Mankew, author the major market sellers on macro and micro economics for the basic economics course at Harvard, points to what he calls a 'big surpise' that the Communist Manifesto is higher up the Amazon 100 best sellers in economics than Adam Smith's Wealth Of Nations.

I am not sure what this means but I am pleased to note that Andrew Skinner's edition of the Wealth Of Nations, including his excellent introductions to volume 1 and 2, are the best selling versions on Amazon: Volume 1 is at 56th and volume 2 is at 89th respectively.

Andrew Skinner was one of the leading editors of the incomparable Oxford Edition of the Works and Correspondence of Adam Smith, which remains not only the scholar's edition, par excellence, though I have a penchant for Edwin Canaan's 1937 edition too, but also amazingly good value in the Liberty Fund edition (a photo-exact replica of the Oxford edition).

You can order either or both on Amazon.

More on Gregory Clark's Thesis

Arnold Kling of EconLog (here) posts a comment of Gregory Clark’s ‘Farewell To Alms’ (Princeton University Press).

It summarises parts of Clark’s argument and comments on it. There are some comments from readers too.

Worth a visit.

Next Installment on Greg Clark's 'Farewell to Alms' on 4 September

There’s an interesting discussion, ‘10 Questions for Greg Clark’ (31 August), here, which you should read.

It makes a lot more sense that just reading to page 189 of what his research is showing. For those of us following the on-line debate on Marginal Revolution (here)

Part III will commence on Tuesday 4 September, covering pages 193-272 of Gregory Clark’s ‘A Farewell to Alms’ (Princeton University Press).

It is a most impressive read and he presents the data in a clear manner. The way we are be asked to read it by Tyler Cowen of Marginal Revolution, with the self-denying ordinance not to read ahead of the debate, makes it like a detective story, in that we do not know where Greg Clark is taking us in his avalanche of ideas, some of which cause fluttering in the towers where economists (mainly of the neoclassical variety) reside.

It’s well worth your time for visits and so is your purchase of Greg’s book.

Adam Smith's 'History is Not all That Different from Gregory Clark's to page 189

I have not yet got to Greg Clark’s presentation of his central thesis that selection pressure caused a cultural or genetically transmitted change on humans living in ‘England’ (I presume he means what we Scots call ‘Britain’) so that from 1800 onwards economic development promoted what some historians, but by no means all, call the ‘industrial revolution’, a vague designation for forty to sixty years development of power-driven machinery that enabled the commercial economy to become a capitalist economy and mobilised the people who made this possible.

So far, I have read to page 189, from strictly following Tyler Cowen’s ‘rules’ for participating in the on-line debate on Marginal Revolution.

The most salient feature is Greg Clark’s statistical evidence that shows that people in the 1800 were no better of in subsistence (mainly calorie) levels than their foreparents were 10,000 years ago. More specifically and problematically, Greg Clark asserts that there were no ‘institutional changes’ changes from 1250 to 1800. Perhaps Greg elaborates ahead on what he means by this?

Running through the book so far, there is an implied, occasionally specific, idea that the ‘Washington Concensus’ in the World Bank and IMF have got the wrong concepts of development. This is bound up with a critique of neoclassical economists, wrapped together, misleadingly, with Adam Smith and Wealth Of Nations. I have challenged Gregory Clark on this last assertion that Adam Smith’s ideas have anything to do with neoclassical economics or with their development nostrums for the World Bank and IMF. To his credit he accepts that point but he does not withdraw it on the grounds that ‘Smithian economics’ is now bound up with the neoclassical attribution, somehow making his own attribution acceptable if not correct! I am disappointed at his stance on this point.

Let me take up some general points to see if we have consensus.

That subsistence standards did not rise, and may have regularly fallen, in the period covered (whether from 10,000 years ago or from 1250) is not challenged. It was a necessary consequence of what Greg calls the ‘Malthusian Trap’. If subsistence rose, more children would survive and per capita subsistence would fall back to where its ‘normal’ level. True. For the overwhelming bulk of the people. Forager societies were stable for thousands of years because they did not (could not) save surplus sustenance much above subsistence (no refrigerators). Foragers continued, and continue, to survive as small bands spread across the world (to mid-18th century, known and unknown).

But in agriculture (another so-called ‘revolution’, this time lasting thousands of years), a surplus could be stored (herds, flocks, seedstock and feedstock) ‘owned’ as property by rich elites, who used the surpluses to mobilise armed force and found civilisations, the dertritus of which abounds in the northern hemisphere of Europe, the near East and India and China. These civilisaitons came and went. The serfs, armed retainers and slaves remained and survived on ‘normal’ subsistence throughout.

With the appearance of settlements, from groups of hovels to brickbuilt towns, later cities, the age of commerce (‘at last’, wrote Adam Smith) emerged, with trade between town and country, long distance trade and conquest among territories. The average intake of subsistence for the mass of people hardly changed because though output grew, so did population. But the scale of the ‘magnificance’ of the stone monuments, artifacts and such like continued for thousands of years too, having no effect on the subsistence statistics, as shown in Greg Clark’s data.

He measures one important criterion of consumption, but it does not measure ‘progress’ either materially in cities, power and technology under the control of the elites, or intellectually in myth, superstition, beliefs in ‘invisible gods’, mathematics, science, knowledge, and literature, art and ‘dance’. All of it socially transmittable across space and time. I do not know about genetically.

Adam Smith’s (NOT neoclassical) growth ‘model’ (more a ‘process’) attempted to capture necessary changes brought about by traded exchange of produced goods, inclusive of annual surplus (net profits). Capital in foraging was of the ‘grub-stake’ kind – for a few days while hunting. Capital in agriculture and shepherding could sustain people between seasons, and on war campaigns
between sowing and harvests. Capital in commerce, through invented mediums of money, and accounting, within price systems, could be used to put materials and new employment together in ‘wheels of circulation’ that caused ‘perpetual’ growth trajectories, perfectly consistent with level subsistence standards over many generations, indeed over millennia.

Smith wrote of the institutional environment (a preferable but NEVER a sufficient condition) that would accumulate social contributions into higher growth rates. He did NOT describe these social conditions as pre-conditions of development or growth. Minute compound growth rates (well below 1 per cent) would have long term, slow and gradual effects, without necessarily affecting mass per capita subsistence levels. Indeed, he viewed the fall of Rome and the destruction of the commercial society in a thousand year period, from 476 BC to the 15th century, as the prelude to a commercial revival that by the 18th century was manifest in Britain and parts of Western Europe. Wealth Of Nations (is NOT an economics textbook) is about these processes. It should be read along with his Lectures On Jurisprudence.

So far, I have seen nothing in ‘Farewell to Alms’, excellent as it is and great to read, that endorses his assertion that Adam Smith (from Kirkcaldy, not Chicago) is far in his thinking from Greg’s history account. I cannot say the same thing for the neoclassical consensus. On this point Gregory and I may find agreement.

The Gregory Clark Debate Continues

Greg Clark replies:

“On Adam Smith and modern economists
I accept Gavin Kennedy's comment that it was wrong to attribute to Smith the simplified version of his views that modern economists typically associate with Smith. I was just looking for a convenient shorthand for a set of views. "The Smithian vision" has in some sense become detached from Smith himself.
But on the substance I DO want to claim that Smith and others have a false picture of the past. Economic scholarship about, in particular, medieval England has advanced enormously in the past 50 years, and gives us a very different picture of early societies than was possible in earlier years. Smith could not have understood that there had been NO institutional improvement between 1200 and 1800.
In particular markets were much more developed than Tyler supposes in his critique. Grain markets by 1200-99, for example, seem to have been integrated nationally (see my web page, "Markets and Economic Growth? The Grain Market in Medieval England (2001))."
Comment

It’s not clear from Greg’s comment what he means by:

“Smith could not have understood that there had been NO institutional improvement between 1200 and 1800.”

Does Greg mean:

That Adam Smith a) did not realise that there had been institutional improvement between 1200 and 1800;

or b) that he could not argue (if he had seen the recent scholarship) that there had been none?

Smith’s Lectures On Jurisprudence (1762-63) were precisely about the institutional improvements in Britain from the changes in the feudal tenure system compared to the allodial (war lords) that preceded the feudal period.

He analysed in detail the changes from absolute to constitutional monarchy from the 15th century to the 18th century and the shift from taxation solely at the behest of the sovereign to taxation via the authority of parliament (England fought a civil war over the issue). These changes led to increased economic activities by the richer burgers in the towns in their reliable raising of taxation for the King's government.

In the Elizabethan period much was done by the monarchy to initiate various schemes to spread commerce into the country (see Joan Thirsk’s titles and Cunningham’s).

The shift from city guilds to spread quality and employments in the ‘trades’ led to a retrograde deadweight in the 18th century, which Smith discussed in great detail in Wealth Of Nations. These an many other changes were underway, mainly unnoticed long before 1800.

If Gregory is arguing that none of this mattered (no institutional change), I would need more evidence. Perhaps it will come from additional reading in his book, but I am following Tyler Cowen’s ordinance not to read ‘a head’.

If on the other hand, the institutional change was much greater than Smith appreciated then I will not find Greg's case as problematical as I do at present. I am referring to his case involving Smith’s writings, not to Greg’s general thesis, which I am not fully conversant with having read to chapter 9 only so far.

Incidentally, that:

"The Smithian vision" has in some sense become detached from Smith himself”
is no reason for Greg to attribute ideas to Smith from the Chicago Smith versions, which he never had. If the modern neoclassical version is wrongly attributed to Smith by name, then surely scholars are beholden not to treat such midespread misattributions lightly? At the bare minimum they should not link incorrect ideas to a person by name.

You should visit Marginal Revolution and follow the debate on Greg Clark's 'A Farewll to Arms' (Princeton University Press).

Gregory Clark and Adam Smith

Posted on Marginal Revolution in Tyler Cowen's Debate on Greory Clark's new book, A Farewell to Alms, Princeton University Press, August 2007.

I think we must distinguish sharply between the Adam Smith from Kirkcaldy who wrote Wealth Of Nations and the ‘Adam Smith’ from Chicago who didn’t and ‘his followers’, that is those who taught in American campuses in the 20th century who never read his books for themselves, but who believed versions of his alleged ideas in the form of popular quotations selected by their tutors (many, if not most, of whom hadn’t read Adam Smith’s books either).

Gregory Clark narrowly evades being lumped completely with the latter, but he is in the ante-chamber of accepting Chicago’ neoclassical version of Adam Smith care of George Stigler and Co. (See pages 145-6 of Farewell to Arms).

Smith did not say that ‘people everywhere are the same’ (a ludicrous statement – they are not even the same in the same family!). He said, as did Hume, that human nature is the same, within the range of possible varieties, and has been throughout the ages. Readings of Herodotus, Machiavelli, the Bible, Shakespeare, et al, show human characters that modern readers can relate to. Smith discusses some of this in his Lectures in Rhetoric and Belles Lettres (1762-3) published by Liberty Press. In so far as ‘material preferences and aspirations’ means anything, Smith said that the motive of ‘seeking to better themselves’ was endemic. This was not just narrowly about ‘material preferences’; it is in many things (natural elements causing humans to seek shelter, etc.,) where modern sets of ‘material preferences’ did not exist.

It wasn’t that growth was guaranteed given ‘given the right incentives’, as if the latter was a pre-condition for the growth. Smith explicitly rejected that notion in his criticism of the Francois Quesnay, who believed ‘perfect liberty’ was a pre-condition for opulence. Smith asserted: ‘ If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered’ (WN IV.ix.28: p 674). Hence, Greg’s statement, which melds with his, perhaps justified criticism of the World Bank and IMF economists (trained in, and practitioners of, neoclassical economics and also unread in Smith too), on pages 145-6 needs revision.

I am not clear where Smith in Wealth Of Nations ‘repeatedly explains’ poor performance in the pre-industrial world as a deficiency in ‘incentives’. If it does permeate the WB and IMF and econ depts, they did not get it, and much else that they preach, from Smith. His critique of mercantile political economy was that its foreign trade and colonial policies distorted the British economy (made it under perform in growth terms) because it provided the wrong (not ‘poor’) incentives (Book IV and chapter IX of Book V).

Being reasonably familiar with Smith’s historical approach, I am not sure where his ‘vision’ has been unconfirmed by empiricists. Greg has a narrow vision of Smith’s account of the revival of European commercial societies following the 1,000 year interregnum after the fall of Rome in the 5th century to the 15th century. Smith's Lectures On Jurisprudence and Wealth Of Nations clearly show his attention to elements of this revival, starting in nascent trade from small settlements and towns, mainly near waterways and coasts, and the country-town trade in agricultural and manufacturing products, and in the transformation of serfdom into tenancy farming. If ‘serious empirical studies’ contradict Smith’s actual analysis I shall need a great deal more convincing from Greg.

Commercial societies did not begin in 1800 (an arbitrary boundary, more of a Polanyi argument). They had a long history, linked to foreign trade and improving technology (think of the chronometer in long distance navigation which was proven in Captain Cook’s voyages; bookkeeping in Venice, and so on). Smith was the long-run specialist par excellence. His so-called ‘followers’ in US academe are epigones in this regard.

Slight Interruption to Lost Legacy

Apologies for litle blogging since Saturday but I have been in transit once again to France and the usual teething problems were endured while re-connecting to the web French Wanadoo and Orange as getting better) and while doing domestic chores to make the house habitable. Fortunately family were here earlier and the place was spotless.

However, I am now up and running, and I start with a posted contribution to the Tyler Cowen organised debate on Marginal Revolution (www.marginarevolution.com) of Gregory Clark's new book, Farewell to Alms, published this month. Have a look at the second instalment of the debate (the first had 58 comments!) by going to MR and scrolling down the page a fair way.

I shall add to my initial comments, perhaps. I shall also probably expand on mine on Lost Legacy too where there are important ideas in contention.

A Small Contribution to the Debate on Marginal Revolution on Gregory Clark's, 'A Farewell to Alms'

Following yesterday's post on the online debate over on Marginal Revolution, I append a short comment on my reading of pages 1-112. For context visit Marginal Revolution, ands scroll down the posts until you find the debate. What do you think? Join in if you are minded.

Gregory Clark’s theme in the first 112 pages of 'A Farewell to Alms' centres on the long-standing average subsistence intake of food/calories from stone-age times to 1800, and displays an admirable, indeed ingenious, grasp of the statistical evidence. Finding this claim compelling, I think we should step back a little and ask: is the evidence exceptional, in the sense that: is that all we have to say about human societies over the same period? Was history abut nothing else beside permanent low average diets; is that all that happened?

Following the rules, I have not read or looked beyond Tyler Cowen’s limit of 112 pages. But it occurs to me that a great deal more was happening during that period, at least in different parts of the world that suggest Gregory is focusing on an interesting, even arresting, but less important part of the social evolution of people.

We can see this in the evidence from ‘newly discovered’ hunter-gather societies outside Europe from the 16th century (note, Europe was counting; stone-age man was not), and it was the explorers who were looking over long distances, the tribes were not. Gregory Clark’s point, which I accept, is that the average consumption of the people in those ships’ crews, their sponsors in Europe and the mass of people outside the elites, had subsistence levels not much different, if at all, from the ‘savage’ tribes they found in distant lands. The savage tribes were egalitarian and on subsistence (still are); the explorers were unequal and the bulk were on subsistence.

There was a difference, and highly significant, the subsistence level explorers came from societies that had accumulated surpluses in wealth: ‘the annual product of the necessaries, conveniences and amusements of life' - not money! (Adam Smith, Richard Cantillon, etc.,), much of what went to the minority elites (their pampered consumption) and also into productive consumption (towns, road, harbours, ships, weapons and other trappings of ‘civilisation’).

The mass of people of all ages lived off subsistence, if they hadn’t population would never have grown at all, but in some societies, over millennia, part of the annual surplus went into social infra-structure, including literature, knowledge, and technology, and it was this that which brought Britian (at the end of a long chain of social and economic development, through Adam Smith’s Four Ages of Man) to ‘1800’, the watershed where everything changed for them and now us.

I look forward to reading (when Tyler Cowen says its OK) Gregory Clark’s development of his theme.

Join Tyler Cowen's Online Debate on Greg Clark's 'Farewell to Alms'

Over at Marginal revolution (here) , Tyler Cowen is conducting an open comments session on Greg Clark’s new book, about to be published by Princeton University Press, ‘A Farewell to Alms’ and it is drawing a large number of comments from serious people about the book’s unique thesis, that by 1800 the per capita living (food intake) standards were no higher in Britain than 10,000 years ago, but fairly quickly, they shot ahead, first in Britain and then in Europe and North America.

Clark’s book is about showing this (pages 1-112) and then (rest of his book) why it happened and what this meant for the world (technology, globalisation, poverty and wealth, etc.,).

Tyler is also doing this in stages, so for this week it is pages 1 to 112, with a strict embargo on comments going beyond the prescribed sections so that discussion will be focussed. And it is.

I read through the comments today and found them most interesting; naturally, I did not agree with all of them, and the author, Greg Clark, also joins in making small points, so as not to cramp the debate (and it is turning into a real debate; like being in a high-level seminar).

Here are Tyer Cowen’s rules:

Ground rules for 'tomorrow's' MR BookForum

1. Be even more polite than usual.
2. Relate your points to Greg Clark's book as much as possible. This is a forum on his book.
3. You are engaging the book, and if you end up in a running back and forth with another commentator, the odds that you are producing a public good are no more than p = 0.21.
4. Comments which "leap ahead" and focus on later parts of the book, beyond the specified pages, will be deleted, no matter how brilliant.

A Taster: A Farewell to Alms, pp.1-112
Tyler Cowen

To start the book Greg lays out his central claim that most of human history can be explained by a Malthusian model. By this he means that changes in birth and death rates are the means of changing the real wage in the long run. He also suggests it is very hard to raise living standards in the long run, again short of leaving Malthusian conditions, as England later did.

These pages contain some of the book's most important material. If Clark is right, one relatively simple model can explain a great deal of human history.
From reading his book, I've upped my attachment to the Malthusian model from p = 0.2 to p = 0.37; that's a big shift and it's to Clark's credit. But I am still not convinced or even at p = 0.5, and here is why...

For the rest of Tyler’s comments and the debate, including Greg Clark's comments, you must visit Marginal Revolution. It’s the best read you’ll get in Blogland on this subject.

I shall add my comment later this weekend, after I get to France.

Is This Serious or a Deep Joke?

From: Economics of Utopia: H. G. Wells 23 August

"From its beginning the earthly study of economics has been infertile and unhelpful, because of the mass of unanalysed and scarcely suspected assumptions upon which it rested. The facts were ignored that trade is a bye-product and not an essential factor in social life, that property is a plastic and fluctuating convention, that value is capable of impersonal treatment only in the case of the most generalised requirements. Wealth was measured by the standards of exchange. Society was regarded as a practically unlimited number of avaricious adult units incapable of any other subordinate groupings than business partnerships, and the sources of competition were assumed to be inexhaustible. Upon such quicksands rose an edifice that aped the securities of material science, developed a technical jargon and professed the discovery of “laws.” Our liberation from these false presumptions through the rhetoric of Carlyle and Ruskin and the activities of the Socialists, is more apparent than real. The old edifice oppresses us still, repaired and altered by indifferent builders, underpinned in places, and with a slight change of name. “Political Economy” has been painted out, and instead we read “Economics—under entirely new management.” Modern Economics differs mainly from old Political Economy in having produced no Adam Smith. The old “Political Economy” made certain generalisations, and they were mostly wrong; new Economics evades generalisations, and seems to lack the intellectual power to make them. The science hangs like a gathering fog in a valley, a fog which begins nowhere and goes nowhere, an incidental, unmeaning inconvenience to passers-by. Its most typical exponents display a disposition to disavow generalisations altogether, to claim consideration as “experts,” and to make immediate political application of that conceded claim. Now Newton, Darwin, Dalton, Davy, Joule, and Adam Smith did not affect this “expert” hankey-pankey, becoming enough in a hairdresser or a fashionable physician, but indecent in a philosopher or a man of science. In this state of impotent expertness, however, or in some equally unsound state, economics must struggle on—a science that is no science, a floundering lore wallowing in a mud of statistics—until either the study of the material organisation of production on the one hand as a development of physics and geography, or the study of social aggregation on the other, renders enduring

Comment
Could anybody tell me what the above is about? It's from the Cambridge Forecast Group Blog here.

Its was written in yellow in on a blue background. The organisation seems serious enough, but what's the message?

Over Pessimistic reading of Adam Smith's Correspondence or Lack of it Surviving

Irwin M. Stelzer, a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London) sets a very standard for his making a sloppy statement in his piece, ‘Financial Markets and the Real Economy’ in Yahoo News (here):(22 August).

He quotes from a letter from David Hume to Adam Smith:

“In the longer-term, it is the hard lessons learned by lenders and borrowers that will matter. It was ever thus. On 27 June 1772, David Hume wrote to Adam Smith, commenting on the financial crisis of the day, "...On the whole, I believe, that the Check given to our exorbitant and ill grounded Credit will prove of Advantage in the long run, as it will reduce people to more solid and less sanguine Projects, and at the same time introduce Frugality among the Merchants and Manufacturers: What say you?"

Unfortunately, so far as I can tell, Smith never answered Hume's question.”

Comment
Does it not occur to Irwin that he might not be expecting too high a standard of retained correspondence in the 18th century, which might very well explain the absence of a copy of the response from Adam Smith to his friend David Hume. [See: Corr. Letter no 131 from David Hume: pp 161-3]

At the time Smith was in Kirkcaldy, busy with Wealth Of Nations. There are wide gaps in his correspondence that has survived, as shown in ‘Correspondence of Adam Smith’ (Liberty Fund, 1987).

For example the previous letter (no 130) we have is dated ‘February 1772’ (Corr. P 161) and the subsequent letter (no 132) is dated ‘3 September 1772’ (Corr. P 163). We also known that he had most of his papers burned just before he died.

Possibilities: he replied to David Hume, but Hume did not preserve it; he replied to David Hume but did not keep a copy of it (no photocopiers! Or no amanuensis, or clerk), or he did not reply by letter to David Hume. We do know that he ‘replied’ to questions about the credit crisis lading to the failure of the ‘Ayr Bank’ in 1773, because Wealth Of Nations contains a detailed analysis of the crisis in WN II.ii.71-78, pp 311-17 and footnotes.

But in any of the three eventualities, there is no way of knowing. It is presumptuous to write: “Unfortunately, so far as I can tell, Smith never answered Hume's question” because this puts the burden of proof on whether his entire correspondence survived, or even the bulk of it.

The absence of evidence is not evidence of absence. Irwin should have written:

“Unfortunately, if Smith did reply to David Hume to answer his question, no copy of the letter appears to have survived, but he did give a detailed explanation of the credit problems leading to business bankruptsies in 1772-3 and the Ayr Bank episode in Wealth Of Nations, which we know Hume read the book before he died. It may also have been a topic of conversation when they met.”

Good News and Bad News: light blogging...

I am light blogging today and probably tomorrow due to having completed the manuscript for my new book: "Adam Smith: the moral philosopher and his political economy" (working title) and which I am now preparing to file electronically for the publisher, Palgrave Macmillan.

It now goes off to the publisher and to the general editor of 'Great Thinkers in Economics', an ambitious 28-volume series, to be published in 2008. If it passes the editorial test, the referees' test, and the publisher's test, that gets me to the copy editor's query-test, and then sometime later, to proofs and publication. But don't let's run ahead; these tests are not formalities. I'm about 20,000 words over the maximum if they accept it (and 128,000 words over if they don't!).

However, after three years, almost fulltime research and writing (with Lost Legacy filling gaps for relaxation), I am within hours of compiling the separate chapter files into one and pressing 'send'. I am nervous, of course. I printed off two copies today (528 pages @ 128,000 words) and I keep looking through random pages, just in case I have missed something. Daft, I know, but after over 20 books, this is still the most difficult time for an author, or at least this one.

On Saturday, I am off to our French home for six weeks (apologies) and another couple of days out of Blogland while travelling and getting reconnected to the net via Wanadoo-Orange in rural France, not exactly broadband most hours of the day.

Hope to be back on line after the weekend, but I also hope to post on Lost Legacy no later than Thursday of this week.

Sensible Sunday Thoughts on the Invisible Hand

Peter Boettke writes here:

“Are Spontaneous Orders Always Beneficial?”

“A debate rages in social science circles on whether a strong commitment to spontaneous order theorizing commits a thinker to a Panglosean world view. Lets be clear – it doesn’t. The invisible hand always works within a specified set or rule environment. In short conclusions of beneficial efficiency or undesirable perversity are institutionally contingent.”

Comment
Interesting from the Austrian Economists' Blog. ‘Spontaneous Order’ is a concept of Hayek’s adopted within Austrian circles, of which I prefer to think of the idea within it as being better expressed as ‘emergent order’, because ‘spontaneous’ implies to much, in my mind of simultaneity, rather than gradually emerging through time.

That one individual acts unintentionally, accidentally or inventively in a manner that has beneficial effects on self, others, or society, need not, and probably does not, have a resonance immediately in others and it may be some time, maybe generations, before simlar individual acts become widespread. This implies an evolutionarily process, and not one of infinite velocity.

It also disrupts the idea of Panglosean ‘best of all possible worlds’, because at any moment in time the ‘better world’ status may not yet have emerged, and its characteristics may not complete the ‘improvement’ (states of society can be reversed, changes can peter out, and, as likely, may not be noticed). Fashions take time to be copied; there is a gap between first adopters and late adopters; it took several thousand years for agriculture to spread (some have never reached it still); norms slowly change; and so on.

However, let us put Peter Boettke’s idea that ‘The invisible hand always works within a specified set or rule environment.’ I can see what he means but it rubbishes the idea of ‘an invisible hand’.

In Adam Smith’s use of it as a metaphor in Wealth Of Nations the situation is directed at the risk aversion of merchants to exposing themselves to the risks of trade with foreigners, or at least people a long distance from them. (WN IV.ii.9. p 456) In Moral Sentiments it is about rich landlords distributing surplus from their land to tenants and retainers sufficient for them to be near the same subsistence as they would have received if the land was equally divided among them. (TMS IV.1.10: p 184)

Now the metaphor of the invisible hand can only be said to be working (whatever that means in social science?) after it has done its job, i.e., that enough risk averse merchants have invested locally (one or two may not be noticed) to raise domestic investment (the whole is the sum of its parts). It may be that only the few who are most risk averse have done this, while the majority who have invested in the foreign trade of consumption or the carrying trade in pursuit of higher profits have discounted their risk aversion. The invisible hand has not touched them, or whatever this mystical force does to ‘lead’ them.

In the case of the rich landlord, who does not distribute his surplus (by allowing tenants and others to keep back sufficient for their subsistence out of their delivery of harvests to the landlord), and who prefers or his indifferent to the increase in child mortality, early deaths from disease, and general inability for the starving to continue working, the affect of his actions is to reduce the available workforce to continue working on his land. They starve first; the landlord will starve next. Again, unless the landlord does feed his tenants (or allow them to feed themselves) his continuation as a landlord is at risk, from covetous neighbours with more well-fed armed retainers.

Hence, what is the invisible hand ‘doing’.

If risk-averse merchants do keep their capital close to them, then it is alleged that the invisible hand is ‘working’, or as Peter puts it, it is ‘institutionally contingent’; if landlords do what they can only do – meet the subsistence costs of their tenants, like they must do when paying the costs of, say, the builders of their large houses – then the ‘invisible hand’ is ‘leading them’ to ‘beneficial efficiency’.

This makes ‘the invisible hand’ somewhat empty of content. It’s worse than Panglosean illusions about the ‘best of all possible worlds’: it operates when what will happen if risk averse or rich landlords do what they have no choice but to do in their circumstances, but does not work when they do something else, which is also something they would do if they were less risk averse or particularly myopic.

Silly Saturday Stories, no 3

To last month’s ‘Invisible Foot’ we had ‘an Invisible Economic Hand’, and today its: ‘Invisible hand missing fingers’. The imagination of sub-editors clearly knows no bounds.

'Invisible hand missing fingers’ ‘heads a review by Andrew Allentuck: of P. J. O’Rourke’s new book, ‘On the Wealth of Nations’, in the Canadian Globe and Mail (18 August) here:

“Smith, who died in 1790, was the last man to know everything. A philosopher, he wrote Theory of Moral Sentiments, arguing that man's innate ability to identify with others was stronger than selfishness. In Wealth of Nations, he used self-interest as the key to explaining why people seek profit and why the process of seeking is good for everybody. Work and payment had to be voluntary. This was to be the basis for laissez-faire economics, the concept that markets, left to themselves, would make the most of everyone's talents and resources.”

Comment
Andrew Allentuck probably makes good sense, in the stle of P. J. O’Rourke with his closing remark:

“O'Rourke's work is a blend of interpretation and misunderstanding wrapped in some soon-to-be-dated jokes. "Economists cannot predict the future any better than Jennifer Aniston and Donald Rumsfeld could predict Brad Pitt and Iraq." P. J. O'Rourke on Smith is headed for obscurity. Its references to soon-to-be-forgotten personalities will leave it cherished by fans of O'Rourke's wisecracks and ignored by everybody else”

However his own interpretation of Adam Smith (‘laissez-faire economics’, ‘good for everybody’, and ‘left to themselves’), is some long way off from what Adam Smith actually wrote in Wealth Of Nations about self interest and he wrote absolutely nothing about ‘laissez faire’, anywhere in any of his Works

People confuse him with the French Physiocrats, whom Smith met in 1766 and did not agree with them on that specific demand for laissez faire, not surprisingly first uttered by a merchant in the French dirigiste regime of M. Colbert!

His name was M. Le Gendre, described as a ‘most sensible and plain spoken’ merchant,. His actual words reportedly were ‘laissez nous faire’ (leave us alone) and they were addressed in 1690 to Colbert, the 17th century minister whose regulation of merchants was notorious for its oppressive licensing, inspection and control, and for its stifling inefficiencies (this was French bureaucracy at its worst).

Jean Vincent, Seigneur de Gournay, popularised a version of Le Gendre’s appeal to be freed of petty regulation among the Physiocrats, though being French he did not appear to be in favour of free-trade.

The author who took the Le Gendre’s words and dropped ‘nous’ and turned laissez nous fair’ (let us alone) into ‘laissez faire’ (let alone) into a principle of economic policy, was the Marquis d’Argenson (1694-1757), who was an active promoter of economic theory and a member of the world’s first economics club (salon in France), the Club d’Entresol (1726). He was also a Foreign Minister of France at the Court of Louis XV for two years. He did not publish his ideas, but circulated them in manuscripts around the French intelligentsia, as was the custom.

Boisguillebert (1646-1714), another early pioneer of French economics, used the words laissez faire in his writing, but it was it was d’Argenson who turned it into a maxim and made it central to the writings of some of the Physiocrats. Quesnay, for example, did not include laissez faire in his General Maxims of Government (1758).

These an other interesting bit of history can be found in ‘Economic Thought and Policy, Oxford University Press, 1949, 54-89 by D. H. Macregor (Professor of Political Economy at Oxford).

Smith didn’t use it either because, I suspect, he knew how devious and monopolistic were ‘merchants and manufacturers’ and never fell for the idea that they could be ‘left to themselves’. After all, the English government in the 17th cntury devolved powers to the town guilds, originally to promote employment and quality manufacturing, and Smith was well aware of how the town merchants had turned the law from a promoter of employment and industry into a protection racket for monopoly pricing and restricive employment.

Sandra Peart Returns to Her Blog After 8 Month's Absence

A welcome return to the Blogosphere of Sandra Peart and David Levy who founded and run the Blog, www.adamsmithlives.blogs.com, and who have been voluntarily absent since 8 January.

All those interested in the History of Economic Thought will welcome the return of an authoritative source of clear thinking about the history of economic ideas.

Reading it regularly last year, I always got the impression that we are only being invited to see the tip of the iceberg of what Sandra and David have to offer. They maintain their scarcity value mainly because of the prodigious amount of work they are doing in other aspects of their academic work. They have high energy and the rare quality of great amounts of patience with beginners entering into their chosen fields of interest, a combination not always easily followed. I saw them at work with graduate students at the Summer Institute and the History of Economics Annual Conference at GMU last June.

Their first return posting is about Frank Knight, whose book, Risk, Uncertainty, and Profit (early 20th century – my battered copy from undergraduate days is still in my library book case), was once mainline reading. I am sure I will find that he was a much more prolific author than the single book by which I know him.

It’s good to see the best among us taking time to share small bits of their deep knowledge.

Sandra has taken a new appointment as Dean of the Jepson School of Leadership Studies at the University of Richmond (Virginia) here and here

You can get a glimpse of Sandra’s approach to modern teaching and learning, and faculty development from this extract from an interview conducted in January 2007 (I now see why she has been so busy between January and August with no time for Blogging, which in Sandra’s work style, it means she has been really, really busy!).

Bold statements are the interviewer's questions:

“Jepson is already making vast contributions to our national intellectual discourse and our knowledge of leadership. The work that is being done on leadership at the Jepson School brings national attention to the field and I shouldn’t wish to change any of that. What I might be able to add, should the faculty at the School welcome this, is increased collaboration between economists and leadership studies. I have ideas about enhancing two kinds of collaboration: between economists with an interest in their disciplinary history and the Jepson faculty; and between experimental economists and leadership faculty. The first endeavor would add a relatively untapped dimension to the history of economic thought and leadership studies: exploring leadership insights of political economists such as David Hume, Adam Smith, J. S. Mill and Frank Knight. Secondly, if leadership is a means by which individual and collective interests play out, subjecting our ideas about institutions to experimental procedures would be an important contribution to leadership research. I’d like to help make these collaborations happen.

How does your area of scholarship, economic thought and political economy connect to the study of leadership?

Economic thought in earlier centuries was very much concerned with ethics and the mechanisms by which ethical decision making emerges. Since at least the time of Adam Smith, political economists have been interested in the question of how individuals, motivated by self-interest, can come together and make decisions affecting the group or polity. In 1759, Smith wrote the Theory of Moral Sentiments, in which he makes the case that people are essentially imaginative, social beings who care about approbation or approval, and who want not only to be praised but praiseworthy. He grounds a system of ethics on this argument and says that humans who exchange with one another do so in a social context so that we're not solely motivated by private concerns.

A number of leadership questions arise quite naturally because we all are a mixture of private and social motives. What sorts of institutions help ensure that the best (most effective and also ethical) decisions emerge from the group? Who can lead the group? Does it matter how we choose the leader? So, for instance, if a leader is chosen democratically, does this affect his or her effectiveness, compared to a leader who is chosen by fiat? Can leaders who are chosen randomly also be effective? If what Smith argued is correct, that we all have the capacity to lead, then as long as people in the group perceive the choice of leader is fair or unbiased, then random leadership should work and prove effective.

While we have some faculty at Jepson who have studied economics and others with a keen interest in the discipline, you will be the first economist. How do you see yourself sharing your scholarship and expertise? Do you anticipate teaching any courses in economics or are there other ways you plan to incorporate your field of study into the Jepson curriculum?

The experience of leading a major curriculum revision taught me a great deal about building coalitions and support among disparate faculty. What I bring to the Jepson School, given my disciplinary interests, is a willingness to work with business school faculty to strengthen already-existing connections. I teach game theory as a cross-listed course in economics and business that counts as an elective in our leadership minor. Among other things, here we study how actors (firms, nations or people) come to be leaders moving first and thus pre-empt their rivals. We look at what it means to be a rational actor and whether rationality consists of acting competitively, selfishly, cooperatively or altruistically. We examine how people come to modify their actions and choices when they talk to each other about what it means to be selfish or cooperative. We consider whether repeated interactions yield the same sort of choices (leaders) as one time interactions. In experimental economics, much of this is put to test in the lab. So, an additional course that might fruitfully be offered both to leadership and business or economics students would focus on experimental economics. "Law and Economics" and "Public Choice Economics" would be also be potential courses. In a course on public choice, the key question to explore is how individuals come together to form and run a collective. But that begs the question of leadership, and it makes a good deal of sense now to think about leadership in the context of public-choice economics.

First and foremost, I am a historian of economic thought. I came to leadership studies because many questions relating to leadership were treated in Adam Smith’s Theory of Moral Sentiments and The Wealth of Nations, and J. S. Mill’s Utilitarianism, On Liberty and Principles of Political Economy. A course that works through some or all of these texts would offer a great deal both to students of economics and of leadership.”

Read the interview in full here.

A Professional Interviews a Professional At the Top of Their Game

Reason online (here) carries an excellent and interesting article reporting on a conversation between Nick Gillespie (‘reason’ in the transcript below) and Tyler Cowen, a numero uno among bloggers (Marginal Revolution), entitled ‘Inside the Mind of an inner economist’ (10 August) here.

I offer two extracts and then a comment:

Part One (enjoy professionals at work):

reason (8:53:55 AM): you write of the limits of applying economics to everything. at one point you even call out a couple of fellow economists for being caricatures of utility-maximizing drones applying supply and demand, etc. to every aspect of human life. where do you draw the line in applying econ principles to human activity?

Cowen (8:55:10 AM): economics—properly understood—applies to human choices quite generally. It even seems to apply to other animals, at least mammals. Gordon Tullock wrote a great book on the economics of insect societies. the problem is when people think that everything boils down to money, or buying and selling. I'm still very influenced by [Ludwig von] Mises's notion of economics as a general "logic of choice." [James] Buchanan and Tullock, my colleagues, have promoted much the same.

reason (8:55:55 AM): you love mises but didn't name your book "the inner praxeologist"...

Cowen (8:56:26 AM): my publisher advised against that idea.

reason (8:56:44 AM): besides buchanan and tullock, the creators of the public choice school of thought, who are your heroes in economic thought?

Cowen (8:57:21 AM): Thomas Schelling is a big one. also Adam Smith and his integration of economics, psychology, and a notion of moral sentiments. Milton Friedman on policy. Hayek. He "got" the dynamic virtues of capitalism better than just about anybody. We've yet to fully absorb those insights. It's a long list.

reason (8:59:28 AM): what's the role of human emotion in understanding economics? i agree that mises was on to something when he referred to humans as "choosers"--that our ability to choose is one basic thing that defines us. but we don't do that rationally. or not just rationally.
we're hardwired to have extreme emotional responses. can economic science deal with that?

Cowen (9:00:49 AM): Human emotion is paramount in life and choice. I think of my book, in part, as "economics for the emotional." I'm very influenced by the French moralists, Schopenhauer, and Adam Smith on this point. That's a neglected strand of Western thought among economists and I'd like to bring it back. Schelling has it in his writings, though perhaps not very self consciously. Thomas Schelling that is, not the German Idealist Schelling.

reason (9:02:19 AM): does the behavioral work of people such as nobel co-laureates vernon smith and daniel kahneman undermine the notion of individualism in the traditional or classical liberal sense? that is, they talk about how certain structures and institutional arrangements will create very predictable behavior in individuals. that suggests that we may think we exercise choice, but we really don't.

Cowen (9:03:07 AM): Smith and Kahneman seem to differ on this. Smith thinks that individual irrationality "washes out" in broader market settings. I've never heard or read Kahneman argue that. oddly Kahneman's scheme leaves more room for individuals to matter, though smith is the libertarian, not he.

reason (9:04:22 AM): among economists under the age of, say 60, (or pick an age), whose work do you most admire?

Cowen (9:05:17 AM): I truly love my George Mason colleagues Bryan Caplan, Robin Hanson, Alex Tabarrok, among others. I am quite taken by Greg Clark's new book, A Farewell to Alms, also. [Freakonomics author] Steven Levitt has been important in a positive way.

reason (9:05:19 AM): how do you mean, with regards to levitt?

Cowen (9:05:56 AM): Freakonomics has both made economics broader, more about real life, and has forced a lot of specialists to think more explicitly about incentives.

reason (9:06:15 AM): do you think the general level of economic literacy is higher now than 30 years ago? if so, will that have an effect on public policy?

Cowen (9:06:59 AM): literacy is much higher, especially among the left where hardly anyone still glorifies socialism. I don't see policy getting better in this country, but it is around the world.

reason (9:07:33 AM): why wouldn't a better general understanding of econ affect policy over the long run? and why is it getting better around the world?

Cowen (9:08:40 AM): the collapse of communism was a huge event, much bigger than we think, and its positive ramifications are just starting to kick in. Americans perceive themselves as doing well, correctly, and they see less need to change. Our big success at markets has made it a lot easier to afford big government as well.

reason (9:09:35 AM): that's a message buried in a new book by your new colleague, john v.c. nye—that britain could afford big government when it levied big taxes for most of the 19th century. talk a little about why george mason has become such an incubator of interesting economics.

Cowen (9:10:12 AM): John is one of the smartest people I know. George Mason consistently hires interesting people and we expect them to be interesting. We provide one of the very best intellectual environments in modern economics academia.
The Mercatus Center [of which Cowen is general director] has been essential to building up what is happening at GMU; it would have been impossible without Mercatus.

reason (9:11:20 AM): who do you think is overrated among your generational peers? what departments or institutions are declining as george mason rises (not that it's a zero-sum game completely).

Cowen (9:12:53 AM): A lot of mid-level schools just don't have anyone interesting to me. Right now Harvard is a clear No. 1, by either mainstream or my personal standards. Overrated, that is a tough question. We are in a world where people don't acquire Arrow, Friedman, or Samuelson-like reputations. The overrated are not a problem, the problem is that the ratings are pretty concentrated in the first place, and maybe don't last that long, as people move into consulting or other endeavors.

reason (9:13:05 AM): names, dammit, give me names!

Cowen (9:13:33 AM): to clarify when I wrote "ratings are pretty concentrated": I mean there are lots of specialists rated highly by their immediate peers and not know to the broader world; that makes it hard for anyone to be overrated. any economist with a downward sloping demand curve, and opportunity cost, is underrated.

reason (9:13:44 AM): is specialization a general development throughout academia—areas of specialization have been getting tighter and tighter?

Cowen (9:14:28 AM): absolutely, academia is ruled by Adam Smith's principle of the division of labor and we don't have enough generalists.

Part 2:

reason (9:16:20 AM): what are the battles we've lost probably permanently?

Cowen (9:17:54 AM): I don't, for instance, think we'll ever roll back big government. But we can get rid of many government interventions or make them less intrusive and get all those people out of prison who are sitting there for simply having possessed marijuana, for instance. and we need to stop taxes from rising to European levels. America is a great provider of innovation and global public goods and if that dried up the world would be much, much worse off. we should be making our economy freer, not less free. but the talk of overturning or reversing the entire New Deal and welfare state is, in my view, not going to get us anywhere.

reason (9:18:21 AM): but we can effect "marginal revolutions," as you suggest on your blog, right?

Cowen (9:18:46 AM): "Small steps toward a much better world!"

reason (9:18:42 AM): give a couple of examples of such.

Cowen (9:19:40 AM): We need serious deregulation in health care. We need to rethink many parts of the war on drugs. We need to get long-run government spending under control. Those are a few examples.

Comment
Enjoy the exchange in the first part. And take close interest in the second smaller part. It is pure Smithian. Pragmatic, not dogmatic.

Smith’s big issue was mercantile political economy. Everything in Wealth Of Nations led to the objective of removing its policies from the British economy (that included withdrawing from the British American colonies) and allowing the flow of surplus capital to work on the domestic economy with a policy of trade without tariff protection and without the dangerous and wasteful jealousy of trade with neighbours, which promoted wars, boycotts and the waste of productive potential.

He too concluded that his programme, though closely argued in Wealth Of Nations, was not going to be adopted soon, if ever. He likened the proposition that free trade would be restored to a belief in utopia. Hence, he settled for winnowing this or that illiberal policy out of the suite of protectionist policies then in vogue in Britain.

Tyler Cowen takes the same approach to ‘US big government’: ‘I don’t think we'll ever roll back big government. But we can get rid of many government interventions or make them less intrusive and get all those people out of prison who are sitting there for simply having possessed marijuana, for instance. and we need to stop taxes from rising to European levels.’

Remember Tyler Cowen is a libertarian with a small ‘l’. He will have more influence on US policy by selecting his targets and seeking to influence others than he would if he went at big government in a full frontal, everything must change by next week, loud voice. If only more reformers would adopt this Smithian stance and apply it to their influence initiatives.

An 'Invisible Foot' Last Week: This Week and 'Invisible Economic Hand'

In the “Against Hilary” Blog, here:
we receive another example of the inane use of Adam Smith’s name in a squalid attempt to spice up the message.

It appears under the unpromising title of: ‘The Price of Hilary Clinton’s Healthcare Plan? Invisible’ by Amanda Carpenter.

Amanda quotes and coments, she claims, from a speech of Senator Clinton’s:

“I would be a steady, sensible hand in the economy, in the White House,” she said on a CNBC television program last week. In other words, if elected president in 2008, it would be Clinton’s “sensible” hand guiding the market, not Adam Smith’s invisible, economic hand.”

Comment
This is going to get tiresome before long. I have nothing other than neutrality in who becomes President, or who is President of the United States. That’s the proper business of the good folk in the USA.

Whoever started the nonsense about Adam Smith and his alleged ‘invisible hand’ (not supported by what Smith wrote) they have a lot to answer for.

A Producer In Search of a Idea for a Programme

On NY Public Radio, a producer got carried away with an idea for a radio show (from an intern?) (here):
“In 1776, writer Adam Smith came up with a theory: when lots of buyers and lots of sellers get together, the resulting "market price" that emerges through all that buying and selling is in fact the work of an "invisible hand." He meant god. We think he really meant "emergence." This segment, we go looking for invisible hands in a variety of places: at an ox-guessing contest in Plymoth, England, in the roiling mass of traders in the "pit" of the New York Securities and Exchange, and also in the secret recipe that makes Google such a great search engine. Author Steven Johnson explains the art of Google-bombing. Producer Ben Rubin presents the bottom-up organization of stock trading in sound.”

Comment
The premise of the radio show falls at the first hurdle.

Adam Smith did not link buyers and sellers to markets or their prices, analysed in Book I. He used, once only in a million words, 'an invisible hand' as a metaphor to the risk aversion of merchants in regard to risking their capital in foreign trade (Book IV). This had nothing to with markets.

That is a notion originating in the 20th century near 59th Street, Chicago, and had nothing to do with his book, 'An Inquiry into the Nature and Causes of the Wealth of Nations', 1776

Natural Liberty Was Not About Laissez Faire

There is a debate underway between Alex Tabarrok and Dani Rodrik ‘about the blinkers (or otherwise) of libertarianism’, Henry reports from “Crooked Timber (‘Out of the crooked timber of humanity, no straight thing was ever made’ (here) from which I picked out this paragraph:

“Now, I am the last person to deny that the invisible hand is a very powerful and valuable concept, and I’m certainly not going to deny the fundamental theorems of welfare economics; Debreu’s Theory of Value is one of my favorite books. Under certain precisely specified mathematical conditions, perfectly competitive markets inhabited by perfectly rational agents will allocate scarce resources in ways which cannot be altered without making some people worse off. Whether those conditions are satisfied by any economic system in the real world is an empirical question, and the answer is of course No. Given that those theorems do not apply, the efficiency of markets is another empirical question, or rather a whole series of questions, with answers depending on the market and the tasks they are being asked to perform. There are many situations where markets are a very valuable and powerful social technology, a useful way of coordinating actions, allocating resources, and eliciting valuable efforts. … There are other situations where they produce awful, even perverse results, and still others where they’d never begin to get off the ground, like funding basic research or national defense. …”

Comment
Debreu’s Theory of Value is a culminating example of neoclassical general equilibrium theory and the speaker’s assessment, despite it being a ‘favourite book’, is a lovely summary of the triumph of non-relevance over value: ‘Whether those conditions are satisfied by any economic system in the real world is an empirical question, and the answer is of course No.’

It reminds me of the misapplication of Natural Liberty, mentioned several times in Wealth Of Nations by Adam Smith, to laissez faire as if they are connected, or worse, identical. Unable to find a reference from Smith to laissez faire (he never mentioned the words) a sleight-of-hand occurred by labelling Natural Liberty as Smith’s theory of laissez faire.

This only exposes the limited grasp of those authors who trumpet their findings of the Natural Law theories as being about laissez faire, which were taught to Adam Smith as well as by him at the University of Glasgow. Smith would have been surprised to find himself credited in the 20th century with the original work of Hugo Grotius, Samuel von Pufendorf (both jurists) in the 17th century, Gersham Carmichael and Francis Hutcheson (both moral philosophers) in the 18th century. From Hutcheson, Smith taught Natural Law theories in his jurisprudence lectures on moral philosophy, including political economy.

Natural Liberty had a far larger role in moral philosophy than as a mere synonym for laissez faire. Natural law was about the fundamental human rights to protection by the negative virtue of justice from depredations by others on an individual’s person, reputation and estate, and his ‘right of trafficking with those who are willing to deal with him’ (Lectures in Jurisprudence, i.12: p 8). It was the basis by which all societies and all political regimes were to be judged. It was not linked to any specific society, regime or economy.

Laissez faire was associated with some supporters of the Physiocrats and Smith met with them during his tour of France in 1764-6. He did not accept that laissez faire was a policy with which he could agree whole heartedly, hence it does not appear in his books. His suspicions, to put it mildly, of the likely (and well known in experience) conduct of ‘merchants and manufacturers’ are well rehearsed in Wealth Of Nations and play a large part in his polemic against the mercantile political economy, largely promoted, lobbied for, and implemented by supine legislatures, from groups of the very same ‘merchants and manufacturers’ who demanded laissez faire, i.e., to be left alone to conduct their business without interference, not only of the state, but of the consumers who were victims of their depredations and breaches of natural liberty.

The examples that Smith gives of the victims of breaches in Natural Liberty are those labourers and business people denied access to specific trades and specific markets by cartels and monopolies run by the guilds and trades of most towns in the UK. Governments enforced the monopoly privileges that they had been induced to establish by the ‘sophistry’ of ‘merchants and manufacturers’.

Which institutions were selected to remove these breaches of natural liberty? It was not enough to set all trades free; the justice system, an arm of government (Book V), was needed to supervise the conduct of merchants and manufacturers because without such supervision they would revert to, or introduce, the conduct for which they were famous in Wealth Of Nations. This can be seen as the inner fallacy of laissez faire.

Smith acknowledged this is his disregard for the slogan and in his practical policies for reforming mercantile political economy. The best essay written on Smith’s non-support for laissez faire was published by Jacob Viner (University of Chicago) in 1928: (Viner, J. 1928. ‘Adam Smith and Laissez Faire’, Adam Smith 1776-1928: lectures to commemorate the sesquicentennial pf the publication of Wealth of Nations, Augusts M. Kelly, Fairfield, NJ). Viner details the tolerable exceptions to free trade:

● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’;
● Punishment and enforcement after the act for dishonesty, violence, and fraud;
● Sterling marks on plate and stamps upon linen and woollen cloth
● Enforcement of contracts;
● Wages by law to be paid in money, not goods;
● Regulations of paper money in banking;
● Obligations to build party wars to prevent the spread of fire;
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);
● Premiums and other encouragements to advance the linen and woollen industries’;
● Police or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’,
● ensuring the ‘cheapness or plenty [of provisions]’;
● patrols by town guards, fire fighters and other hazardous accidents;
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours);
● Coinage and the Mint;
● Post office;
● Regulation of institutions, i.e., company structures (joint stock companies; co-partneries, regulated companies);
● Temporary monopolies, including copyright, patents, if fixed duration;
● Education of youth (‘village schools’, curriculum design,);
● Education of people of all ages (tythes or land tax)
● Encouragement of ‘the frequency and gaiety of publick diversions’:
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population;
● Encouragement of martial exercises;
● Registration of mortgages for land, houses and boats over two tons;
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’;
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’)
● Moderate export taxes on wool exports for government revenue;

Some of these he recognised were breaches of Natural Liberty and he defended that on grounds that natural rights between and among individuals could conflict and a decision would have to be made by legislators, backed by the justice system.

He also made the point, directed at the Physiocrats specifically, that demands for the imposition of Natural Liberty before freedom of trade could prosper, as Dr Quesnay and others insisted, were unnecessary:

‘Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that, in the political body, the natural effort which every man is continually making to better his own condition is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy, in some degree, both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man, in the same manner as it has done in the natural body for remedying those of his sloth and intemperance.’ (WN IV.ix.28: p 675)

Natural Liberty, Natural Rights, and Natural Justice were principles of jurisprudence which Smith supported as indicators of human rights; they were not synonymous with the political economy of societies. Laissez faire was a doctrine for an economy, which Smith did not support. Some libertarians have either forgotten Smith’s elucidation of these points or did not know about them.

Silly Sunday Stories on Adam Smith, no. 3

Pulsipher Boardgame Design (“This blog contains comments by Dr. Lewis Pulsipher about boardgames he is designing or has designed in the past, as well as comments on game design in general)”(12 August).

“The Invisible Hand

"The pseudonymous "Adam Smith" wrote, in "Wealth of Nations", about the invisible hand "to illustrate how those who seek wealth by following their individual self-interest assist society as a whole and build the common good." (Wikipedia) In Britannia-like games, there seems to be an "invisible hand" that tends to balance the game, over many plays, as players recognize that everything they do affects the game as a whole. E.g., in situations where it might be possible to wipe out a nation, a player might choose not to do so because he knows that later this will be of too much benefit to a third player.”

Comment
None… I’m off to watch a football match instead (er, sorry America, ‘soccer’). Whoever wrote the 'Wikipedia' entry is, well, less than satisfactory as an authority on Adam Smith.

People Fret About the Most Inconsequential Trivia

The Wall Street Journal carries a post: ‘ Enigmatic Elgar’s Anniversary Year’ by Barrymore Laurence (9 August):

“This year, Britain began changing the design of its £20 note. Why, you might ask, should this concern a music critic? Because while the obverse of the note bears a portrait of Queen Elizabeth II, since 1999 the reverse has shown the composer Sir Edward Elgar (1857-1934). And now, during his 150th anniversary year, Elgar is being replaced by the pioneering 18th-century economist Adam Smith. The timing seemed awkward, at least to this Yank.

“By telephone from London, the Bank of England's chief cashier, Andrew Bailey -- whose signature is on current British banknotes -- explained that the change came out of the periodic need to outsmart counterfeiters, "who tend to target the £20 note because it is the one most commonly circulated." Mr. Bailey assured me, however, that the changeover from Elgar to Smith will probably last through 2010. At this point, he said, only 10% to 20% of the 1.2 billion or 1.3 billion £20 notes in circulation have been replaced. "So you can see that a very large number of Elgar notes will remain in circulation throughout the Elgar year."

Comment
So there we are a fuss about nothing by devotees of Elgar who fretted because Adam Smith, of whom some had never heard of, and some objected because he was Scottish and they wrongly thought the Bank of England was ‘English’, though it was founded by a Scotsman and is in fact the central bank of the United Kingdom of Great Britain and Northern Ireland and not specifically ‘English’.

So everybody has a 80-90 per cent chance throughout Elgar’s 150th anniversary year of receiving a £20 note with his image on it, not Smith’s, because the roll-out will take three years to replace it with the new Adam Smith note.

10 October 2007 is, of course, the 270th anniversary of Adam Smith’s matriculation at the University of Glasgow in 1737… and my family bought me a mint-condition ‘Adam Smith’ twenty-pound note and framed it for our dining room wall. In due course, the Bank of England will replace Adam Smith’s image with another.

I wonder if Scotland will still be in the United Kingdom by then?

A Return to Speenhamland?

Discussion is opened on using taxation to ‘persuade’ low-paid people to favour the ending of protectionism, or 'globalisation'. Strange, as protective tariffs keep out foreign products because they are cheaper (if they ain’t cheaper, they don’t need tariff protection). Two contributions from the Adam Smith Institute and Don’t trip up (‘a witty saying proves nothing’)here: (

Stephen Farrington writes: ‘Subsidies for embracing free trade’

“The abiding protectionism of the US electorate continues to astound economists, who are seeking ways to reduce this irrational prejudice and introduce the electorate to the benefits of free trade. The Adam Smith Institute Blog reports on a suggested New Deal for Globalisation:

In this month's Foreign Affairs Kenneth Scheve and Matthew Slaughter argue that the only way to overcome the tide of protectionism in the US is for the government to introduce a massive redisitribution program to bring the fruit of open markets to the doorstep of those earning below the median wage.

The authors have clearly been studying their public choice theory by suggesting that voters should be bribed into supporting 'good' policies instead of being convinced. The Adam Smith Institute Blog is understandably skeptical, concluding:

Large-scale redistribution under the banner of a "New Deal for Globalisation" would disincentivize low skilled workers from actually working, while encouraging them to be bought off by the government in return for globally beneficial liberalisation. It would also push some high skilled workers to simply move to lower taxed countries where their contribution would be better appreciated!

This is not the way to create a globally competitive economy. Education could have a much more immediate effect than these the authors admit. And to the extent that protectionists want to bash China et al., perhaps the country’s leaders would do better to actually lead and stand firm on a liberal principle.

Electoral bribery is certainly not good policy. Perhaps instead of bribing the electorate, the state could provide a safety net to ensure the free market does not ravage everyone when the protectionist barriers collapse. Then, the benefits of globalisation will be felt without too much pain. There is also the nice warm glow that come[s] from having a government that ensures no one is impoverished.

Better equality of opportunity could also help workers embrace free trade. If workers can easily move between jobs and into growing sectors, they could find themselves abandoning the protected industries in favour of higher paid jobs in boom sectors. This can only occur if there is quality education available for all and an open economy that allows movement of labour.

For globalisation to be popular, workers need to see there are real benefits to free trade. This does not mean engaging in ideological protectionism to ensure they are insulated against the effects of free trade and thus support it. It means structuring the economy so free trade genuinely benefits those it is supposed to, and demolishing the obstacles that prevent this. If the benefits of free trade cannot be proven to the mass electorate, then maybe economists should reconsider their theories of globalisation. Quite simply, they should prove globalisation works not bribe us to believe it should.”

Comment
First, I must say I found Stephen Farrington’s ‘Don’t trip up’, a refreshingly well written Blog and reading down the page I found other interesting articles.

Adam Smith spent a large part of Wealth Of Nations considering what might be done (and why) about the massive distortion in the domestic economy from supporting colonies in North America, awarding monopolies of trade to British merchants and manufacturers (causing the Navigation Acts which enforced the monopolies), facing European rivals in regular wars to protect the monopolies, and suffering from the drain of scarce capital away from domestic productive activity (including economic growth) into the colonial trade with its higher profits. This last was the main part of his analysis of the defects of international trade under monopolistic conditions in Book IV.

Today we have what it has become fashionable to call ‘globalisation’. The same problem remains. World trade is not characterised by free trade. To discuss international trade in ‘free trade’ terms is a myth. Many ‘free trade’ countries are among the worst ‘protectionists’ and their commitment to free trade is highly conditional.

World trade is almost exclusively ‘protected trade’. The so-called ‘free trade’ areas are ‘protected’ areas, particularly in food and low-cost manufacturing (now extended from simple ‘toys’ and ‘trinkets’ to high-end technology products). All countries are ready to slap on tariffs if their imports begin or threaten to begin to seriously compete with domestic producers. All countries are in favour, in principle, with adopting policies to raise people out of abject poverty, as regular concerts remind us. None is in favour of unilateral free trade. All are reconciled to a less than free-trade international system. This applies to G8 countries and the poorest countries in Africa, Asia and South America, as their domestic tariffs, even against poor and poorer neighbours show.

That’s why Smith resigned himself in trying to ameliorate individual obstacles to free trade rather than demanding that countries (neighbours) gave up their isolationist tariff protection against each other. That is why he concluded with absolute certainty that ‘to expect, indeed, that the freedom of trade should ever be in its entirety restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it’ (Wealth Of Nations, IV.ii.43: p 471).

He pointed in vain to the fact that Britain would gain enormously from free trade with France, and vice versa, but political and popular prejudices (jealous rivalries) prevented this happy occurrence and both continued thereafter to buy dearer from other countries, making merchants richer and consumers poorer.

In that context what should we make of the proposal to alter income tax rates from poor and richer consumers? Apart from would it work as intended, we should ask would these adjustments do what most other subsidies do: remain in force long after it is realised that create more distortions than they remove. The early example of the fallacy would be the system named after the local magistrates at Speenhamland, Berkshire in 1795, who thought up a means to alleviate the duress caused by a rise in grain prices, which spread across the country and subsidized the wages of the poor.

I’m all for cutting taxes but I doubt if this would work as intended. If the problem is perceived as one of adjustment the helpful remedy would be to do as Smith advised: introduce the changes where they affect only one set of businesses the change should be ‘restored only by slow gradations, and with a great deal of reserve and circumspection’ (WN IV.ii.40:p 469).

The idea of a ‘big bang’ strategy of unilaterally abandoning tariff exclusion is appealing, but as it is unlikely ever to happen, greater policy pressure should be directed at single targets, which include big ones, such as the EU’s agricultural subsidies.

But let’s leave domestic income taxation out of it.

Adam Smith Did Not 'Start' Capitalism

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Benny Zwartz, reports in the Age (Melbourne: theage.co.au): here

"The Religious Write: ‘Off to market’ (6 August) about Samuel Gregg, now a high-flyer with the Acton Institute, a free-market think tank in the United States, who wrote a new book, “Catholic Social Teaching and the Market Economy”, which gets ‘in some solid blows against both the economic teaching of Catholic bishops and the interventionist welfare state’.

‘Gregg notes that the church thought through many issues of capitalism long before Adam Smith. Most people think capitalism began with Smith and his 1776 book The Wealth of Nations, but everything in it had been said before, much of it by Jesuits in 16th century Spain confronted with the explosion of commerce from the New World, he says’."Merchants were asking theologians, 'can I charge interest?' 'How do I judge what's a fair price?' Capitalism began in the medieval period in northern Italy, Flanders and parts of Spain. That's when Western civilisation really took off.'

‘Gregg says most Christian leaders of all persuasions know little of this history. So the book is designed to teach that history and present an alternative view of economic theory, to start a conversation where the church at present is engaged in a monologue.

He suggests that there is considerable room for difference about economic theory within Christianity. Some think the best way to help the poor is a large welfare state, others argue for a minimal safety net with the rest done by civil institutions such as the church and trade unions. "When we think about morality and economic questions, we can't ignore the evidence of economic science. The greatest poverty-reducing machine in history is the market economy.'

Comment
Samuel Gregg is pushing two themes in his book. One is that ‘capitalism’ was noticed among Jesuit in the 16th century (when Spain was importing inflation in the form of stolen gold from its American conquests) and that ‘capitalism’ had developed in medieval times. The other (not reported in this posting) that Christian theology recognises that the market is ‘the greatest poverty-reducing machine in history’.

Gregg’s first assertion is less credible than the second. It all comes down to a recognition of what we mean by ‘capitalism’, a word not invented until 1854 to deal with the unique situation of substantial flows of finance capital from the early years of the industrial revolution. Words can obstruct understanding as well as liberate it. In the history of economics, several schools overlap with ideological preferences for words.

Adam Smith designated the appearance of the ‘commercial’ age as occurring in classical Rome and Greece, with the appearance of trade in the Mediterranean area, which was brought to an end in Western Europe by the fall of Rome (5th century) and a reversion to agriculture in various forms, first warlords and then feudal lords.

The Eastern Empire continued for several centuries, but commerce, as it had been in the Western Empire, was a relatively small part of the economy. With the slow revival of commerce from the 15th century, technological progress and basic science, gradually created conditions in which commerce became self-sustaining as a source of growth up through the 18th century, and in the 19th century emerged into what we call capitalism.

For Smith the ‘age of commerce’ was about markets, distant trade and the slow accumulation of capital. Others (example Professor Silver) traced commerce further back that Roman antiquity into activities in Egypt, Syria, Babylon in the Near East, coincidentally, which had been where the ‘age of agriculture’ first appeared from 8,000-11,000 years ago.

Thus, Greg is being ‘a bit previous’ (as the say in London) when he asserts that ‘capitalism began with Smith and his 1776 book The Wealth of Nations’. That is absurd; no book creates a social phenomenon. If Smith had become a preacher, as his mother intended, instead of a moral philosopher, the commercial age would have continued whether he or anybody else noticed. And, incidentally, Smith never used the word ‘capitalism’ in anything he wrote, nor did any of his contemporaries, because it had not yet emerged.

As an example of ideology leading scholars to miss-name phenomena, we have the writings of Karl Polanyi (mid-20th century) who argued strongly that there were no markets, never mind capitalist markets, until the mid-19th century. He steadfastly denied that markets had existed in Roman antiquity – something that denies the evidence of, for instance, the common use of coinage in something as mundane as the pay of the Imperial armies and in everyday transactions for household provisions. What else was coinage for? Polanyi’s theories were close to Marxian and he denied the existence of markets before capitalism for reasons that I find unsatisfactory. You may see if you agree with his argument in: Karl Polanyi [1944] 2001, The Great Transformation: the political and economic origins of our time, Beacon Press, Boston.

The Jesuits in 16th century Spain, as other Christian writers had before then, found a need to answer certain questions about money, interest, usury, and profits precisely because, with the slow revival of commerce from the thousand year interregnum after the fall of Rome, there was a pastoral need among their flocks for guidance in the re-appearance of coinage, financial contracts, and debt management.

The inflow of stolen gold into Spain and Portugal spilled over into a flood of inflation across Western Europe; it didn’t do much for the labouring poor, or indeed the commercial rich, of the Iberian peninsular, it was not used to develop their economies, or begin the transformation of their economies. What was absent was the technology that arrived two centuries or more later, but not in Spain or Portugal, nor their colonies, under the thraldom of fundamentalist Catholic Christianity, complete with its version of the Taliban in the Jesuits order who stifled the necessary secular Enlightenment that occurred in the rest of Europe to the North.

What Adam Smith wrote about in his appreciation of the rise of the commercial age was unique. He didn’t anticipate capitalism, nor ‘found’ it. He wasn’t peddling an ideology, nor anything like one. He was a philosopher, whose task he said in his ‘History of Astronomy’ essay, was to ‘do nothing, but observe everything’, which he carried out admirably in his works.