Saturday, October 27, 2007

"Mark Hodak on Adam Smith": a debate begins

In case you did not read the 'comments' to yesterday's article Mark Hodak replied to my post, as below, and I replied to Mark's comments (also below).

Mark Hodak writes:


I don't think that the article you're critiquing is the one I wrote. I don't understand what conclusions about modern corporations you feel I reached were "erroneous."

I understand Smith's antipathy to the East India Company, and I know full well the contest of WON. What does that have to do with his general concern about agency? It seems to me he was perfectly clear (and prescient) about the agency problem of corporations, and it seems equally clear that he didn't think these problems were limited to monopoly trading companies. What am I missing on this point?

As for the claims of what he didn't foresee, I think you're interpreting that as an attack on his intellect, which is an unfortunate read. None of the readers of this article who have provided me with feedback on it have interpreted this as an attack on Smith, but rather an encomium of the adaptability of the markets Smith was wise enough to free.

By the way, the editors picked the word "folly," not me. But I don't think that should have thrown off a calm reader with regards to intent."
5:36 PM

Gavin Kennedy replies:

Hi Mark

Thank you for your interesting comments. Clearly we do not yet agree.

Your views on modern corporations and their ‘scandals’ are perfectly legitimate for the 21st century. Linking them to Adam Smith’s critique of the East India Company in the 18th century is not. His rhetoric on this subject reflected the temper of the times when the chartered trading companies were either ‘oppressive’ or ‘useless’; legislators were corrupted to pass Acts of Parliament the legalise monopolies or to ‘buy’ the sovereign’s consent to award Royal Charters to these particular companies.

It took around 18 months to send instructions and receive replies to reports London between India (it takes seconds today), making ‘supervision’ by the board’s directors a nominal exercise, and vast scope for misleading them (where bribes did not do it for them).

The officers of the Company in India, if they survived, made fortunes from corruption, as did, on a smaller but still lucrative scale the rest of the employees from managers to clerks, who traded on their ‘own account’ and filched valuable cargo to and from the Company ships. The economic effect on the Indian economy was also ruinous.

In short, the chartered monopoly trading companies were special cases of the joint-stock company structure and Adam Smith’s critique referred specifically to them. He acknowledged the joint stock structure in other case, though until the later 19th century they were not fully established in law and were more tightly regulated.

Examples of joint-stock companies that he favoured included the Bank of England, 1694; the Bank of Scotland, 1695, and the Royal Bank of Scotland, 1727, which were not corrupt, and which were free of his strictures on what is now known as the principal-agent problem, nor were they as badly managed on anything remotely like the scale of the East India Company. He recommended joint stock structures for insurance and large projects like canals.

The basic difference rested on whether joint-stock companies or any companies in fact, co-partnerys or regulated, were made monopolies or not. This seems to be lost on you. Your agenda you are perfectly entitled to project; my criticism is that you finds it necessary to drag Adam Smith into it by weaving his advocacy around well known selective quotations from Wealth Of Nations, a habit to which columnists in US media are addicted, as well as professors.

Smith was not ‘utterly wrong … about corporations’. You may be utterly right about modern corporations, and no doubt many commentators wrote in to say how much they agreed with you, but that is beside the point. Myths about Adam Smith abound and the general knowledge about Adam Smith in US academe is quite disappointingly low, even among some Nobel prize winners.

You claim, “I understand Smith's antipathy to the East India Company, and I know full well the conte[x?]t of WON”. On the evidence presented in your article in Forbes, I am unable to acknowledge your understanding as other than moderate to low.

Your understanding of modern corporations is high and your students will benefit from you concentrating on them.

I accept your point about the sub-editor being responsible for attaching the word 'folly' to the headline.


Blogger Marc'n'NY said...

"The basic difference rested on whether joint-stock companies or any companies in fact, co-partnerys or regulated, were made monopolies or not. This seems to be lost on you."

How, then, do you read this statement:

"It is upon this account that joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one."

To me, that doesn't read like the relevant distinction is monopolies, especially as "this account" appears to refer to agency ("negligence and profusion") rather than theft and fraud.

2:03 am  

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