Tuesday, September 04, 2007

A Marketer Buys a Fallacy About Adam Smith

ChaosScenario (here)
has this piece on “The Integrity of Marketers Throughout History”. Don’t get me wrong, Thomas Sowell’s A Conflict of Visions’ is a good read.

It’s the quote from Wealth Of Nations and the Blog author’s comments that are problematical:

Last week I finished reading Thomas Sowell's excellent treatise, A Conflict of Visions, and I came across this little quote by famed philosopher Adam Smith that reminded me that the reputation marketers have for being dishonest is well earned.
"The proposal of any new law or regulation of commerce which comes from this order [merchants and businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."
-Adam Smith, Wealth of Nations, (1776)

Smith's disclosure here is particularly remarkable when we reflect that he advocated a laissez faire economic system, or a system that operates with minimal government intervention.
What can we do to reverse thousands of years of negative experience? Should that even be our goal, or should we simply tend to our own houses, allowing (as Smith suggested) the laws of supply and demand weed out the stragglers and reward the achievers? - Cam Beck

Almost right and almost as wrong.

Adam Smith never ‘advocated a laissez faire economic system’. That was the French Physiocrats, or some of them, whom he visited in 1764-6. Nor is it quite true he advocated “a system that operates with minimal government intervention.” His was not a 'nighwatchmen state' (that was said mockingly by a Lassell, a socialist; and picked up by the 19th century 'Manchester School' of laissez faire promoting campaigners.

These are post-mid 1960’s insertions by neoclassical economists misreading Wealth Of Nations, or rather not reading it at all, but just believing what their tutors told them (most of whom hadn’t read Wealth Of Nations either – we know this because he never mentioned laissez faire once in anything he wrote and they would not knowingly assert that he did if they knew it wasn’t true, would they?).

The quote is about ‘merchants and manufacturers’ imbued with the mercantile political economy of the mid-18th century, who try to persuade the legislature (government) to adopt ‘any new law or regulation of commerce’ to institute monopolies or protection from competition in this or that product market.
It is not about ‘marketers’ as we know them today. It’s about monopolists seeking to narrow the competition, raise prices and ensure higher profits, common enough occurrences in the Adam Smith’s day.

He was not opposed to government intervention as a matter of principle as such. He certainly didn’t think any individual, government minister or official could make production, pricing or marketing decisions for anybody at all. He saw specific roles for government and states them in Book V of Wealth Of Nations; he was not sure about whether publicly-funded activities should be managed by the state or by private persons. Officials could be lazy and incompetent; private individuals could be duplicitous and negligent. He left that question unanswered.

Hence, “Cam Beck” is off target on these issues.


Blogger Cameron Beck said...

Hi Gavin -
Thanks for the nod. I assure you that my name is Cam Beck, so quotes are unnecessary. :)

I admit that I haven't read Wealth of Nations in its entirety, but I've read many large chunks of it. I don't think the sort of intervention Smith believes acceptable (such as to protect against monopolies, as you correctly pointed out) is inconsistent with laissez faire economics; it's just a flavor of a very complicated (some might say "nuanced") theory.

The key distinction in principle is between "minimal," and "nonexistent" government intervention. My reading of Smith (and of those who have, in fact, read "Wealth of Nations" in its entirety) leads me to insist (at least to myself, if no one else) that he still fell on the side of "minimalist government intervention," which is consistent with the textbook definition of laissez faire.

I did not say he was for *no* government intervention. As you clearly pointed out, he did find some forms of intervention necessary.

By the way, the quote I pulled is a cautionary piece of advice about how to consider proposals about government's role - That isn't inconsistent with the definition of laissez faire, either.

At any rate, I just found it funny that man's distrust of self-interested businessmen hasn't changed in over two centuries. I think his observations as I quoted and as you articulated were spot on.

8:30 pm  
Blogger Gavin Kennedy said...

Hi Cameron ('a guid Scot's name'!)

Thank you for your comment.

A lot of what people say about Smith is to align his thinking with theirs.

Nuanced or otherwise, my reading of his works does not lead to either 'laissez faire', an idea he was familiar with and which he never used. He was particularly critical of Francois Quesnay for stating that 'perfect liberty' was essential for progress to opulence (Book IV, chapter IX). It wasn't, as he put it otheriwse no nation in the world would have progressed at all.

Wealth Of Nations was not a textbook of economics; it was a report of the effects of mercantile political economy on Britain's progress to opulence. He showed how mercantile notions (wealth equals gold stocks; power was conducive to growth; colonies were worthwhile investments; one-sided laws about combinations were conducive to good order and profits) were appropirate policies to follow. He believed that self-interest was not always or normally socially advantageous, or benign.

His critique of government intervention on the scale normal in Britain and France, was directed at the wrong policies of government and not at government policies as intervention. He believed that government interventions were necessary because they would not otherwise be undertaken (public works and institutions, defence, justice, education and protection against certain diseases).

If his programme above had been implemented it would have doubled government expenditure. Plus, if his stated interventions (quality marks on cloths by offical stamping, involving hundreds of inspectors around the UK, plus assay offices for bullion plates, the post office, and the Mint, that would have been a fair number of state employees.

The minimalist 'nighwatchman state' was a mocking notion of Lassalle, the 19th century socialist, made into policy by the 'Manchester School of Free Traders, and not Adam Smith.

In short, current associations of Adam Smith were invented long after he died in 1790, and have entered mainstream neoclassical economics as myths.

But we can disagree on these matters without tensions and anger. Lost Legacy is about trying to restore his true legacy, an uphill struggle against popular views of Adam Smith.

He favoured market solutions to most problems within a strict system of justice and heavy competition to prevent merchants and manufacturers tempted to intervene on behalf of their private interests against the interests of consumers.

This is a good principle for marketers to follow.

Thanks for your comments.

1:12 pm  
Blogger Cameron Beck said...

Gavin - We may indeed disagree without tension and anger, but I gather our disagreements do not amount to much in the long run.

Thank you for your feedback. I'm no economist, but the subject fascinates me.

Cheers. :)

1:52 pm  

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