Sunday, September 02, 2007

A Sunday 'Just So' Story from Malaysia

Puvan J. Selvanathan in ‘NSTonline’ (New Straits Times, Malysia) 2 September, writes “The ‘invisible hand’ now made visible”:

'For about 150 years after the Industrial Revolution of the late 18th century, this virtuous circle sustained, building the robust eco-nomies of today’s wealthiest nations.

As the first Industrial Revolution gathered steam, Adam Smith (1723-1790), the "Father of Modern Economics", published The Wealth of Nations (1776). He spoke of an "invisible hand" that drove singularly exploitative capitalists to better society in spite of themselves. Although opportunists, it was.

Essentially, no matter how bad big business was, the free market kept them honest by forcing them to compete with each other; hence, they strove to deliver quality goods and services at the best prices, or risk losing customers to competitors.

Industrialists created factory towns to guarantee a reliable, happy pool of local labour. The "invisible hand" provided the shops, houses and schools which supported the successive families that were integral to the factory itself — generations working side by side and then replacing each other.

Whatever the company didn’t provide became the responsibility of the government, to whom both businesses and workers paid taxes. Government had a clear role to ensure that "public goods" (such as clean water, sanitation and social welfare) were properly administered and maintained so that basic civic standards were equitable and protected; and that the regulatory environment (property rights and rule of common law) was properly defined and enforced so that society knew how to behave well.

Behind some of the less than correct history, Puvan J. Selvanathan, has something interesting to say in his (?) contrast with the situation in ‘Globalisation’, of which I have no comment.

The so-called ‘industrial revolution’ was actually a many decades-long process by which power-driven machinery, first steam, then electricity, in factories employed many thousands of workers, and administrative and managerial staffs, to produce products as inputs into other products, some proportion for which were goods for immediate consumption.

Like the so-called ‘agricultural revolution’, which lasted several-thousand years, the ‘industrial revolution’ is an highly controversial idea of a ‘revolution’. Adam Smith analysed the revived commercial society from the 15th to the 18th century. He was unaware, as were his contemporaries, of what Rostow called the ‘take-off’ to the consumer society of the 19th-20th centuries.

The roots of commercial society were evident from the 15th century. They were never a ‘free market’ (a point I shall debate soon with Greg Clark, author of 'Farewell to Alms’, on Marginal Revolution, Tyler Cowen’s Blog), nor did Smith write about ‘an "invisible hand" that drove singularly exploitative capitalists to better society in spite of themselves’ and ‘their profiteering motives that kept them in check because they always aimed to extract the most returns from their customers’.

He wrote about ‘merchants’ (wholesale and retail in their warehouses and shops) who were not kept in check by ‘competition’ (would that they were!) but who usually formed monopolies in the towns in which they were located to rig markets against consumers (‘people of the same trade ….’, etc.,).

Smith’s reference to ‘an invisible hand’ was about merchants who were risk averse and for a similar ‘or nearly the same profit’, would prefer to trade locally than trade at a distance (mainly abroad) and in consequence their capital would remain local, adding to domestic economic growth. Abolishing tariffs would force them to compete locally, but Britain kept tariffs, which was Smith's point and not a description of existing free trade in Britain.

In fact, Adam Smith was criticising mercantile political economy that through its monopoly of the American colonial trade made it very profitable for them to assuage their risk aversion and go for the higher profits from such monopoly trade (see Book IV, chapter 2, Wealth Of Nations). The ‘invisible hand’ did not provide ‘the shops, houses and schools’. Smith called on government to provide schools (Book V, Wealth Of Nations); ‘shops and houses’ were provided by merchants and private citizens and had nothing to do with ‘hands’, invisible or otherwise.

Universal education was not adopted in England until 1870 and took years to fully implement. It had been operating for boys in Scotland since the 17th century in ‘little schools’ in every parish.

Puvan J. Selvanathan’s account is idealised and not representative of what happened.
He has written a 'Just So' story of history, separated from the known facts.


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