Stanford Review Mentions Lost Legacy

Lost legacy is mentioned in the current issue of The Stanford Review (30 November, Vol XXXIX, issue 5 (here):

“A Book Review Saga: ‘Professor David Kennedy Takes on Paul Krugman’ by Paul Craft (Features Editor)

“Another comment came from Gavin Kennedy (no relation) who maintains a blog about economic history titled “Adam Smith’s Lost Legacy.” Responding to DeLong’s post and Kennedy’s review, he concludes that Kennedy’s “anti-economist” diagnosis was off the mark. He particularly criticizes Kennedy for mentioning “Adam Smith’s fabled ‘invisible hand’” by claiming that the whole metaphor is not a direct legacy of Smith. He even accuses Kennedy, as DeLong did, of not having ever read Smith. Finally, he concludes that “a historian (should) . . . at least be interested in this . . .” He seems to be playing Kennedy’s own game against him.”

Comment
Lost Legacy is always grateful for mentions, positive or negative, on other publications and Blogs. So thank you Paul Craft and Stanford Review.

From the site statistics for Lost Legacy, I know that the largest percentage of our readers each day live in California. I don't know anything else about them but this fits in with the largest number of visitors each day are in the USA.

My Blog Post in Question (21 October) went as follows:

"Is David Kennedy 'the Stupidist Man Alive'?

There are several comments on economics Blogs on the review of Paul Krugman’s book, ‘The Conscience of a Liberal’ (W. W. Norton, October 2007, $25.95 or $15.57 from Amazon), by David Kennedy (positively no relation!), who is the Donald J. McLachlan Professor of History at Stanford University.

Brad Delong, doyen among economist bloggers (here), reviews Kennedy’s NYT's review without mercy:

‘Stanford's David M. Kennedy reveals that he is a serious contender for the "Stupidest Man Alive".’

"Brad quotes Kennedy’s review of Krugman:

“Paul Krugman is a justly renowned professor of economics and international affairs at Princeton University. His abundant accolades include the John Bates Clark Medal... a distinction... perhaps even more prestigious than... the Nobel.... [Y]et maybe Krugman is not really an economist — at least not according to the definition offered more than a century ago by Francis Amasa Walker, the first president of the American Economic Association, who wrote that laissez-faire “was... used to decide whether a man were an economist at all.” Most modern economists continue to celebrate Walker’s orthodoxy, and behind it, the classical doctrines of Adam Smith, whose fabled “invisible hand” regularly works wonders of production, distribution, innovation and efficiency, provided it is kept free of the meddlesome “nanny state.”... Krugman [is] the anti-economist...”

Brad concludes:

“David Kennedy thus demonstrates that he (a) has never read Adam Smith, and (b) has little acquaintance with modern American economists--who are (like Adam Smith) much more interested in prescribing how the nanny state should meddle to be effective than in protecting the naked market from interference.”

Comment
First, a clarification on my part: I am not familiar with the ‘politics’ of the personalities who populate American academe and this includes where Paul Krugman stands on the continuum of ‘left – right’, ‘classical – neoclassical’ or ‘seriously competent – wildly not so’, and I cannot judge the accuracy of Brad Delong’s assertion, though as it is Brad’s assertion I am inclined to go along with it.

I treat what David Kennedy has written as they stand. That he quotes Francis Amasa Walker (1840 – 1897!) for his criterion of what constitutes and economist in 2007 suggests he is seriously out of touch, and that he associates Adam Smith with laissez faire supports this conclusion.

Adam Smith was not the author of what passes today as ‘classical doctrines’ (an impossibly broad tent covering Malthus, Ricardo and Marx, from among which I would snatch Adam Smith).

The sentence including, “Adam Smith, whose fabled “invisible hand”, gives the game away. David Kennedy, a professor of American history, refers to the ‘fable’ of the invisible hand, but it wasn’t a fable of Adam Smith’s making; for Smith it was merely a handy metaphor when explaining why opening a domestic market to foreign goods for consumption would lead to higher domestic investment, partly by the foreign products competing with domestic products and partly by the risk avoidance of local merchants preferring to invest their capital locally. As the arithmetical whole is the sum of its parts, if local merchants invest locally instead of abroad, domestic capital formation will be higher than otherwise.

For 18th-century readers of Wealth Of Nations (Book IV.ii.9: p456), who were not economists – more likely to be legislators and people who influence them – he summed this process after clearly explaining it by using a common 17th-18th-century literary metaphor of the invisible hand (see Shakespeare’s ‘Macbeth’, Defoe’s ‘Moll Flanders’ or ‘Colonel Jack’, or Voltaire’s Oedipe: 'Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’, etc.,).

The fable of the invisible hand has passed through the string of tenuous development, first as a ‘concept’, then as a ‘theory’, and finally, and banally, a ‘paradigm’!

Its origins are located in the environs of 51st Street, Chicago, and which has been propagated all over American academe, via its graduates and the media, until the fable is now regarded as the reality in all expositions of neoclassical general equilibrium theory (after Samuelson and Debreu) and sanctified by Nobel Prize winners from the Bank of Sweden.

I would expect an historian to know this, or at least to be interested in it.

David Kennedy’s review has received attention (scathingly) from ‘Angry Bear’ and Mark Thoma."

Read the Last Paragraph of Wealth Of Nations

At a meeting of the Tuesday Club in Edinburgh I had occasion to comment on several things the speaker said, which, incidentally, was a most thoughtful and intellectually stimulating analysis – though under the ‘rules’ of the club, they properly remain private to the attendees so as to encourage the most frank of discussions, I referred the participants to the very last paragraph of Wealth Of Nations, in which Adam Smith advised Britain to “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”.

If only his advice had been followed in the 19th and 20th centuries instead of diverting so much blood and treasure into its second Empire, which went the way of the first. As few people ever read Wealth Of Nations, and thereby miss the last page, I extract it for readers of Lost Legacy:

“If it should be found impracticable for Great Britain to draw any considerable augmentation of revenue from any of the resources above mentioned, the only resource which can remain to her, is a diminution of her expense. In the mode of collecting and in that of expending the public revenue, though in both there may be still room for improvement, Great Britain seems to be at least as economical as any of her neighbours. The military establishment which she maintains for her own defence in time of peace, is more moderate than that of any European state, which can pretend to rival her either in wealth or in power. None of these articles, therefore, seem to admit of any considerable reduction of expense. The expense of the peace-establishment of the colonies was, before the commencement of the present disturbances, very considerable, and is an expense which may, and, if no revenue can be drawn from them, ought certainly to be saved altogether. This constant expense in time of peace, though very great, is insignificant in comparison with what the defence of the colonies has cost us in time of war. The last war, which was undertaken altogether on account of the colonies, cost Great Britain, it has already been observed, upwards of ninety millions. The Spanish war of 1739 was principally undertaken on their account; in which, and in the French war that was the consequence of it, Great Britain, spent upwards of forty millions; a great part of which ought justly to be charged to the colonies. In those two wars, the colonies cost Great Britain much more than double the sum which the national debt amounted to before the commencement of the first of them. Had it not been for those wars, that debt might, and probably would by this time, have been completely paid; and had it not been for the colonies, the former of those wars might not, and the latter certainly would not, have been undertaken. It was because the colonies were supposed to be provinces of the British Empire, that this expense was laid out upon them. But countries which contribute neither revenue nor military force towards the support of the empire, cannot be considered as provinces. They may, perhaps, be considered as appendages, as a sort of splendid and shewy equipage of the empire. But if the empire can no longer support the expense of keeping up this equipage, it ought certainly to lay it down; and if it cannot raise its revenue in proportion to its expense, it ought at least to accommodate its expense to its revenue. If the colonies, notwithstanding their refusal to submit to British taxes, are still to be considered as provinces of the British empire, their defence, in some future war, may cost Great Britain as great an expense as it ever has done in any former war. The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the same way as it has been hitherto, is likely to cost, immense expense, without being likely to bring any profit; for the effects of the monopoly of the colony trade, it has been shewn, are to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people; or that they should awake from it themselves, and endeavour to awaken the people. If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expense of defending those provinces in time of war, and of supporting any part of their civil or military establishment in time of peace; and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.” (WN V.iii. 92: pp 946-7)

Setting the Record Straight

The Right Honourable Dr. James Gordon Brown, Prime Minister, has been described on Lost Legacy several times as having been born in Kirkcaldy, as was Adam Smith, but a correspondent writes to me correcting this as an error.

Apparently, Gordon Brown was born in Glasgow (20 February 1951) and moved to Kirkcaldy with his family in 1955, from whence he continued in residence in what is now his constituency. He attended Kirkcaldy Scool, the predecessor of which was attended by Adam Smith in the 18th century.

Apologies. Lost Legacy will always corrects errors of fact whenever it is appraised of them.

Eugene McCarraher's Polemic Against Deidre McCloskey and Adam Smith

For a Christian, Eugene McCarraher (I know, it takes all sorts …), a professor of humanities and director of graduate liberal studies at Villanova University, writes a very unchristian (unless he belongs to a new Taliban wing of Christianity) review of Deirdre McCloskey’s, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press).

I confess I have not yet read her book and Eugene McCarraher has, which gives him a head start, but I am not writing to defend Deidre McCloskey’s work – she can look after herself from what I have read of her –but I think Eugene goes over the top in his blitzkrieg assault on his version of Deidre’s ideas. At best, he could be right that the book is badly written and he has a duty to say so, but he has no duty (other than under the protection of free speech) to write in the manner he did about sets of ideas as if they are those of the devil incarnate.

Here is what Eugene McCarraher, in ‘Books and Culture: a Christian review’(!) (here) writes under the title of: ‘Break on Through the Other Side: Deirdre McCloskey's Bobo Theodicy’: says of Deirdre McCloskey’s views on Adam Smith:

“In the present volume, she only updates the obfuscations of Adam Smith, whose scholarly rehabilitation over the last generation has been a case study in cultural politics. Like many recent students of Smith, McCloskey proudly reminds us that he was a moral philosopher, not a modern, professionalized "economist." Casting Smith as a "radical egalitarian," ardently devoted to the poor and assiduous, McCloskey holds up "sympathy" and "benevolence" as the strongest digits of that "invisible hand" at work crafting a "trusting society."

Comment
Adam Smith’s concepts of ‘sympathy’ and ‘benevolence’, I would have thought, though we learn something new everyday, would appeal, at least to the extent of a sympathetic hearing, to any normally balanced Christian and would not be mocked.

That they are related to Smith’s metaphor of ‘an invisible hand’ is news to me. I note that this is Wednesday and it may have been true on Tuesday but this is another day so, perhaps, it is no longer true. Professor Eugene McCarraher’s graduate students in humanities and liberal studies may be confused by daily re-inventions of well-established meanings to 18th century texts.

“This is nonsense. Smith's "sympathy" never extended very far beyond ambitious tradesmen and artisans. For the poor and the laborers, Smith recommended hunger as a form of moral education. When corn merchants raise prices, he sagely opined in The Wealth of Nations, they "put the inferior rank of people upon thrift and good management." This early example of compassionate conservatism partakes of a larger indifference to empirical reality. If you know anything about slavery or parliamentary enclosure, you'll know that Smith's magnum opus exhibits his gargantuan historical amnesia. In 1,000 pages, Smith barely mentions the dependence of English manufacturing on American slavery, or the dreary tale of dispossession in the English countryside. With his smoke and mirrors about "natural liberty," Smith inaugurated what E. P. Thompson would later memorably call "the enormous condescension of posterity." (For greater honesty about the ravages of enclosure and "natural liberty," read Smith's near-contemporary James Steuart, whom McCloskey doesn't even mention.)”

Comment
Adam Smith’s concepts of human sympathy were not ‘nonsense’, nor were David Hume’s. They were not confined to ‘ambitious tradesmen and artisans’. He wasn’t too fond of scheming and clamouring ‘merchants and manufacturers’, many of whom were ‘tradesmen and artisans’, no doubt ‘ambitious’ to ‘conspire’ with others to raise prices by ‘narrowing the market’. I take it that Eugene McCarraher has read Adam Smith’s books; he should have noticed the central themes of his texts because he might wish to pass that basic requirement onto the ‘graduate students’ he ‘directs’.

“Aside from his talents in the art of historical camouflage, Smith was a prophet of what Peter Sloterdijk has dubbed "cynical reason": "I know what I'm doing is wrong, but I'll do it anyway." In The Theory of Moral Sentiments (1759), which admirers fondly hold up as evidence of their hero's thoughtful probity, Smith praised the civilizing effects of avarice. Fully aware of the folly of pursuing riches—"people ruin themselves," he appeared to scold, "laying out money on trinkets of frivolous utility"—Smith mused nonetheless that "it is well that nature imposes upon us in this manner." "This deception," he continued, "rouses and keeps in continual motion the industry of mankind." That's a pretty clear wink at the duplicity of desire, and despite what they'll say at the Liberty Fund, it really isn't all that far from Bernard Mandeville's more scandalous (and more engaging) celebration of hedonism in The Fable of the Bees. Long before the economist of fashion Paul Nystrom coined the phrase, Smith was pointing to a "philosophy of futility" as the moral economy of capitalism.”

Comment
The allusion to ‘Peter Sloterdijk’s cynical reason’ escapes me. As does Eugene McCarraher’s misreading of Adam Smith’s ‘civilizing effects of avarice’.

Smith was aware of the ‘folly’ of pursuing riches and he cited this as one of the factors that undermined feudal governance (blessed as it was at the time by Eugene McCarraher’s forbears in Christian ethics). These fractious feudal lords were ever at war with neighbours, used violence to contain their serfs (their ‘slaves’ Smith called them), and were oppressive in the extreme. However, they were tempted to acquire ‘trinkets, baubles’ and such like by diverting surplus produce from their domains to the purchase of these ‘useless’ artefacts, meanwhile keeping their peasants on subsistence incomes.

But unknown to them, they were undermining the base of their own power because to acquire these products from nearby ‘towns’, which acquired them from trade with foreign parts of Europe, they had to divert more and more of their annual produce away from paying their retainers, armed force and people who worked their lands, which put paid to their ability to cause strife (and not a little rapine) in the rest of England.

Adam Smith points out that while the objects of their avarice were ‘useless’ (he had very firm ideas on frugality as opposed to prodigality), they nevertheless were the products of the employment of artisans and labourers. In fact he contrasts the dismissal of a thousand feudal retainers with the employment elsewhere of thousands of manufacturing labourers; the former representing the dénouement of feudalism, the latter the beginning of the commercial age of man.

This transformation of feudal society is summed by Eugene McCarraher as ‘a pretty clear wink at the duplicity of desire’! Is Eugene sympathetic for the feudal lords and barons? Would he prefer it to have continued? Was the Reformation a ‘bad’ event?

For Adam Smith it had nothing to do with regret for an age that was passing. The purveyors of selfish avarice had no idea what they were doing (as is often the case in social evolution). But the expanding demand for the trinkets generated demand for the employment of labourers who could produce them, transport them, and distribute them to final customers. No employment meant destitution.

This consequence put poor men to work and fed their families. This was a social benefit. Just as the building of stone churches, cathedrals, and castles created work for labouring men and income for their families, and the acquisitive lust for works of arts – painting, statues, religious artefacts – created work for the artists and artisans over the centuries where there was not much work around, except backbreaking labour in the fields. All this Eugene misses in his diatribe against Deirdre McCloskey and his cheap shots at Adam Smith.

Eugene writes: 'Smith was pointing to a "philosophy of futility" as the moral economy of capitalism’. That some of the initial steps to the ‘age of commerce’ were driven by the silly avarice of a few idle landlords in no way sullies the spread of commerce as a superior creator of ‘opulence’ on a scale unknown in human history. For all the millennia that preceded the 18th century the lot of the poor labourers and their families was a monotonous repetition of unchanging per capita income at or below the level of subsistence. The hewers of the products of land did just that, their heads filled with credulous superstitious nonsense and their aspirations brutalised by the brute course of the events that afflicted their short lives.

Knowledge necessarily came from philosophers who came from within those who lived off the surplus output produced by the labouring majority. The social evolution from the hunter-gathering mode of subsistence through the ages of shepherding, farming and commerce are the themes of Adam Smith’s essay on the History of Astronomy, his Essay on Languages (1761), his Moral Sentiments (1759), his Lectures on Jurisprudence (1762-3), his Lectures on Rhetoric and Belles Lettres (1763) and his Wealth Of Nations (1776).

Adam Smith did not create commerce, or ‘capitalism’ (a 19th century phenomenon, unknown to Smith); he observed and tried to understand what was happening to ensure that for the first time in human history, per capita incomes for all of those in society, not just the rich few with the rest on subsistence only, were rising and continued to rise.

How human societies have managed this process, how they used the vast surplus resources for good or ill, or how they resolve the perennial problems of human life, are not subjects that Adam Smith commented upon. He was a humble philosopher, not a partisan.

When and if Eugene McCarraher reads Adam Smith’s whole legacy he may wish to reflect on how different it is from his somewhat limited idea of it as represented in his review.

Smith did, however, send a message to Eugene McCarraher (don’t ask me how – perhaps it is an example that God’s works are a ‘wonder to behold?). He’ll find it in Moral Sentiments, in Book IV, chapter ii, paragraph 2.12 to 18, pages 231-34.

Ayn Rand and Adam Smith

Mark Mills in SharkAttack (‘a blog show casing the musings of Mark Mills’) here writes:

‘You don’t need to be selfish to believe in capitalism"

“Klein suggests that Rand is merely reproducing the ideas of Adam Smith. The reality is very different. The difference between these two thinkers shows just how little a market economy has to do with amorality. Both Smith and Rand explore how humanity can benefit from the actions of self interest individuals but Rand takes this principal much further. Smith is concerned principally with commerce and industry (his great book is called ‘the wealth of nations’), while Rand makes no effort to set a limit on self interest. Smith’s ‘Theory of moral sentiments’ is a hymn to the value of charity. By contrast, characters in Rand’s books that show generosity are scorned. To see the value of wealth accumulation as a driver of wealth creation does not require you to give up on the idea that in much of life concern for others is a great and noble virtue.

One thing that Klein does not seem to get is that there is a distinction between self-interest and selfishness. It is quite possible to do something that makes you better off but which does no one else any harm (and in fact may be benefiting them). To my way of thinking, this is not selfishness because that requires you to be causing harm to others. This is no semantic difference, it is key to how operates in practice. While self-interest is rewarded, there are laws to prevent selfish behaviour such as lying, stealing, bribery, breaking contracts and using violence. For the market to work there must be legally enforceable limits to the harm people can do to each others. Without them you will have anarchy (or Yeltsin’s Russia as it is otherwise known). This idea was not alien to Smith who imbibed against the power of monopolies, while Rand would doubtless have seen the competition commission as an undue restriction on the strong for the benefit of the weak.

At the root of the different viewpoints of Smith and Rand are fundamentally different views of morality itself. Rand’s philosophy simply turns the world on its head and makes virtue into a vice. Smith is attempting something much more complicated, to set how to create a good society composed of people who are not necessarily good. If we look closely at his famous saying that ‘it is not for the benefit of society that ‘It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.’ We see not a celebration of self interest but a statement of how Smith believed things were. Smith might wish us to be entirely virtuous but he knows we’re not. He understood that to try to build a socialist utopia on such shaky foundations was futile and we would be better off trying to turn mans vices into virtues through the market.

To be a free marketeer a la Adam Smith is miles away from being a cold hearted, Randian sociopath. Trying to win an argument by claiming that your opponents are greedy rather than misguided is low and even Naomi Klein should know better.”

Comment
I know nothing about Naomi Klein or Mark Mills, so I cannot comment on their ‘quarrel’. I do know about Ayn Rand and Adam Smith, though it is many years since I read ‘Atlas Shrugged’ and her shorter philosophical books (The Virtue of Selfishness', 'Capitalism the Unknown Ideal', The New Left', etc.,) which I still have in my library in France from 47 years ago. I recently watched some video’s of talks Ayn Rand gave to a class of students on U-Tube. Because she spoke well, and delivered a very clear philosophical theme, I am sure she won converts to her philosophy. She was a remarkable person.

But she had little in common with Adam Smith, and if Naomi Klein thinks differently then she has not studied either Ayn Rand or Adam Smith very closely. Nor for that matter may Mark Mills have studied Adam Smith closely.

Theory of Moral Sentiments is not a hymn to ‘charity’. It’s about the moral social harmony of society, not from people loving each and everybody else, but from their anonymous dependence on each other, most of whom they never know of, nor need to be concerned about two or more links along the chain of connections among them.

Whereas family connections are framed in social bonds among the members, with diminishing intensity of the bonds as friends and then acquaintances are considered, finally diminishing to zero as the vast world of strangers comes into contact. But our market connections continue productively whether we act from love or indifference and anonymity, if there is a ‘mercenary exchange of good offices’ between us, and we breach no laws and cause no harm.

Going to the extreme of selfishness (‘greed is good’) is neither necessary nor appropriate. Absolute independence is from long-gone past ages of mankind in which self-sufficiency was a virtue, perfect equality ruled, and everybody was poor to the same degree (and life spans were shorter).

Commercial society changed all that.

Absolute dependence of all on everybody else is today’s virtue (Rousseau was wrong!), inequality is its price and everybody is ‘rich’ to different degrees (the poor in the rich countries are incomparably better off materially than the poor in any previous societies), and life spans are longer.

Work in Progress: "Adam Smith: the moral philosopher and his political economy"

I am working on the editor's comments on 'Adam Smith: the moral philosopher and his politcal economy' for Plagrave Macmillan.

The main problem is that the publisher wants a maximum of 100,000 words and my current count is 128,000. This means going through every page and taking out wordage, which is very painful as it affects some of the style, but also the substance. I am at Chapter 2 and have 'lost' all of 500 words! 12 chapters to go...

Perhaps I will get more ruthless as I get used to killing old friends.

Anybody with any advice is most welcome to share it with me.

Where Ayn Rand Went Wrong

As if on cue minutes after the previous post on self interest and selfishness, David Mesaaz, posts on Digg (a service I still do not understand its purpose), a complete understanding of what Adam Smith advocated and how different that is from what Ayn Rand was on about in her ‘Atlas Shrugged’ (here):

'Atlas Shrugged' – 50 years later Ayn Rand
Adam Smith's self-interest never reaches the Randian selfishness that ignores the interest of others. In Smith's mind, an individual's goals cannot be fully achieved in business unless he appeals to the needs of others. Echoed by Ludwig von Mises. Wealth can be acquired only by serving the consumers."

George Stigler Did Not Understand Adam Smith on Self Interest

David Hoopes criticises an ‘award-winning paper from the Academy of Management Review (Ferraro, F., Pfeffer, J., and Sutton, R.I., “Economics Language and Assumptions: How Theory Can Become Self-Fulfilling”)’ in the Blog: Organisations and Markets here.

The award winning article says: “If people are relentless in the pursuit of their own self-interest and equally relentless in their lack of concern for others’ interests. . . .” What? Where did that second part come in?’

I added a comment on the Organisation and Markets' Blog:

“If people are misled that economists assert 'relentless self interest' (in its extreme the 'greed is good' perversion) we have George Stigler to thank (Wealth Of Nations 'is a stupendous palace erected upon the granite of self-interest').

It is a misreading of that famous passage about the 'butcher, the baker, and the brewer' (WN I.ii.9: p 27). Smith specifically enjoins you to address yourself 'not to our own necesities, but of their advantages'.

In bargaining that is what we must do: address the other party's self-interest, not our own. If we both relentlessly address own interests, we would never agree to a deal. We must mediate our self interest by taking account of the other party's self interests.”

I discuss the subject of of Adam Smith's actual views on self interestin more detail in Chapters 22-24 of Adam Smith's Lost Legacy (2005: Palgrave Macmillan).

Lost Legacy Quoted no 4

Over at Economist’s View (here)
Mark Thoma’s leading economics Blog, (Oregon) a piece is picked up from Thursday’s Lost Legacy:

"The Theory of Moral Neuroscience"

Adam Smith's Lost Legacy says this discussion of how neuroscience is confirming the role of empathy in human sociality and morality is "worth a look":

The Theory of Moral Neuroscience, by Ronald Bailey, Reason Online.

It’s great to be noticed in Blog land. Thanks!

Adam Smith's Relatively Large Agenda for Government

La Caixa, Economic Research Dept, of Fxstreet.com here asks, ‘What's to be done with Government?’

“As in any other scientific discipline, economics continues to discover the limitations of earlier ideas. It is also learning what conclusions of the past continue to be valid. In any case, it must be recognized that many of the matters of economic policy being debated today were already controversial more than 200 years ago when the science of economics was born. These comings and goings reveal the difficulties that exist in extracting firm conclusions about matters subject to many influences and perceived from many different points of view. One of the most recurring themes thinkers in economic science have dealt with is the role of Government in the economy, a matter central to the organization of society.

The result is not greatly stimulating. Mercantilists believed that the government generally benefited the economy, at least when it supported domestic production intended for export. Adam Smith’s doctrine then pointed to the damage the Government’s action was capable of inflicting on the free operation of the market. Keynesians considered that the government could contribute to improving economic results and that intervention was a good thing. «Public choice» economists are convinced that the State can often ruin things. Those in favour of «rational expectations» believe that often economic policy is something of an illusion and that it cannot do much to change reality.”

Comment
A somewhat truncated summary of the history of economic ideas that implies through gross simplification misleading ideas of what the protagonists were advocating.

Mercantile political economists (‘mercantalism’ was word invented in Germany and was not known in Adam Smith’s days) were not in favour of government intervention in any sense similar to what that concept means today. If anything, government intervention in the economy was even more hands-off than it is today.

What some ‘merchants and manufacturers’ wanted from legislators was legal enforcement of a domestic monopoly to prevent competition or to impose tariff costs from foreign traders. They preferred having a clear run at export markets. Beyond that they wanted to be left alone to run their businesses. Theirs was a ‘police’ operation, if you like, in their commercial favour.

Aside from the merchants and manufacturers, who were closest to the action of lobbying, influencing and ‘persuading’ gullible legislators and those who influenced them, there were intellectuals writing pamphlets and books on the higher purposes of the government’s role, linking national interests, reasons of state and the balance of trade to national prosperity. How connected the two forces were is another matter. The works of the latter have survived intact and may have greater influence on our perceptions than the confidential lobbying of the merchants and manufacturers seeking favours in pursuit of their self interests.

‘Adam Smith’s doctrine then pointed to the damage the Government’s action was capable of inflicting on the free operation of the market.’

Comment
The slip from what Adam Smith was writing in specific reference to the mercantile policies of the government (protection, bounties, tariffs, wars and colonies) to a general assumption that he opposed all government intervention is as easy to make as it needs to be qualified.

He did not oppose all government intervention by any means, though he did not conceive that government spending would rise to be such a high proportion of GDP. But it is wrong assume that he favoured a small state sector. Within the constraints of 18th century economies, he favoured quite a high amount of government expenditure, and if the full extent of his programme had been followed it would have amounted to sizeable government sector.

Defence, justice, public works and institutions, and the ‘dignity of the sovereign’ was a formidable agenda, especially if his proposals for education (‘a little school in every parish’), and the treatment of ‘noxious diseases’ were costed. In addition, he favoured government regulations of the banking system, interest rates, bank reserves, the stamping of products regarding quality, the post office, licences, and the patent system. The programme of public works need in Britain – thousands of miles of usable roads, pavements and street lighting in towns, harbours, canals and water supplies – amounted to large-scale public budget over many years.

Of course, he cautioned against allowing the government to attempt the impossible, such as directing how merchants and manufacturers should invest their scarce capital. Unfortunately, the free market cannot be left alone to pursue its self interest without any concern of the government. There was too much temptation to resort to monopoly, narrowing of the market, raising prices and protectionism.

Worth A Look

Ronald Bailey reports on The Theory of Moral Neuroscience in Reason Online (free minds, free markets) and reports on recent research showing that ‘Modern brain science is confirming an 18th century philosopher's moral theories’ (2 November).

He quotes from Theory of Moral Snetiments:

"As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation," observed British philosopher and economist Adam Smith in the first chapter of his magisterial The Theory of Moral Sentiment 1759):

"Whatever is the passion which arises from any object in the person principally concerned, an analogous emotion springs up, at the thought of his situation, in the breast of every attentive spectator." Smith's argument is that our ability to empathize with others is at the root of our morality.’ [TMS I.1: p 9 and TMS I.i.4: p 10]

‘[These] findings again buttress Adam Smith's insight from more than two centuries ago that empathy works to prompt us to help our neighbors but attenuates with social distance. "That we should be but little interested, therefore, in the fortune of those whom we can neither serve nor hurt, and who are in every respect so very remote from us, seems wisely ordered by Nature," writes Smith. Wisely ordered or not, modern neuroscience is showing that Nature has so ordered our moral intuitions.’ [TMS III.3.9: p 140]

Comment
The recent science and the links to Adam Smith’s Moral Sentiments are worth a look here. (I’ve added in the details of the references).

Jedediah Purdy on the Invisible Hand (no 374)

Jedediah Purdy writes: Intellectual Climate Change: Preventing environmental disaster is just the latest of many supposedly, on Guardian Unlimited, 20 November, here.

“Today's economic premise, made cliché in Adam Smith's "invisible hand", is that individual self-interest adds up to public interest, and when this doesn't work out, politics can step in to fix the imbalance. The classic imbalance is what economists call externalities, effects of your actions on others that you can ignore, such as the air pollution your car emits. And the classic fix is environmental regulation that re-sets the ground rules of the market to align personal and public interest.”

Comment
Jedediah Purdy brings Adam Smith into his article: ‘Today's economic premise, made cliché in Adam Smith's "invisible hand" ’, but unfortunately it may be ‘today’s cliché', but it had precious little to do with Adam Smith. He didn’t put forward a theory, a concept or a paradigm about the invisible hand doing all that is implied in its modern use.

It was a metaphor, specifically for risk avoidance, which Adam Smith used in Book IV, which was his tough critique of mercantile political economy, not his analysis of how markets work in Books I and II of Wealth Of Nations, which did not mention anything about disembodied hands, invisible or otherwise.

Even when Jedediah Purdy spots the fallacy – ‘when this doesn't work out, politics can step in to fix the imbalance’ – he doesn’t ask the obvious: ‘what happened to this miraculous invisible hand attributed to Adam Smith; is it there or is it not?’

Of course, this has nothing to do with Adam Smith because he never gave the metaphor this role. Indeed, in Books I and II, when discussing how markets work he not only made no claims that individual self-interest ‘adds up to public interest’, but in these two books he give 51 examples of where self-interested individuals damaged the public interest, the exact opposite, but not one example of where he even mentions the invisible hand.

A commentator on his Blog writes: "Today's economic premise, made cliché in Adam Smith's "invisible hand" ’.

‘Ah yes! Knowing that 18th Century Adam was the first one to come up with that cliché is educating indeed.’

Comment
Adam Smith did not even come with this modern cliché, never mind being the ‘first one’ to use it. It was a well-known metaphor in literature during the 17th and 18th centuries (Shakespeare, Defoe, and Voltaire, among others).

Lost Legacy Mentions Gratefully Acknowledged

Lost Legacy is mentioned on the prestigious Adam Smith Institute Blog Review 423 (20 November) (here) written by Netsmith:

“An interesting view of history, that 200 years ago everyone had their own landed estate.”

It’s the piece I wrote on Monday 19 November on ‘The Strange Claim That in Adam Smith's Day 'The Great Majority Had Landed Estates'!’

A Vulgar Interpretation of Adam Smith on Value

An anonymous author Blogs at ‘The GeoChristian’ and in the course of a review of 'For the Beauty of the Earth', by Stephen Bouma-Prediger (who may be the source of the quotation content), they write (here):

“The natural world has no intrinsic value or value irrespective of its usefulness to humans; rather, “a thing has value only when and if it serves some direct human use or can be exchanged for something else that has value.” (Adam Smith)”

Comment
This prompted me to post this piece on the Blog:

‘I think you are confusing Adam Smith’s statements about exchange value (the ratio by which something exchanges for another) with something that may have a value (aesthetic, utility, beauty, symmetry, elegance, or whatever) in itself.

Adam Smith was a moral philospher. His other book, The Theory of Moral Sentiments (1759) would correct your impression of his ideas, which are not often represented well by vulgar modern interpretations by those who write about today’.

No End to the Economic Benefits of the Division of Labour

Chris Farris writing in The Exercise of Vital Powers (commentary on liberty, politics and economics) Blog (here) muses:

“Random thought as I was reading Greenspan’s book. Smith’s fundamental insight was that economic growth occurs with division of labor.

But how much can division of labor can the human mind support? Is there a limit to the complexity we can comprehend, beyond which division of labor ceases to have economic benefit? As we know more and more about less and less we eventually will know everything about nothing.”

Comment
Amusing thought, but misses the point. I am not into logic philosophy but I suppose there is a name for the logical error of extrapolating from a perceived (even measured) trend to arrive at a nonsense conclusion (and no doubt a reader will tell me what it is called).

The division of labour was certainly an idea (its origins preceded Adam Smith by centuries) of which he made great use of, and also pushed it further in the idea of it being limited by the ‘extent of the market’.

Unfortunately, most readers don’t bother reading past the famous pin-factory example (WN I.i.3: pp 14-15), which was widely known about at the time from Diderot’s ‘Encyclopedia’ and various other publications (see Jean-Louis Peaucelle: ‘Adam Smith’s use of multiple references for his pin-making example’, European Journal of the History of Economic Thought, 13:4, Dec 2006, pp 489-512).

If you read on a little further to page 22-23 of Wealth of Nations, you find Smith’s less-famous example of the effect of the international division of labour and specialization in the fabrication of the common woolen coat worn by day labourers. Taken together, you see why Chris Farris is wrong to worry about ‘knowing everything about nothing’.

The breaking down of some work tasks into their constituent parts reaches a physical limit but by separating out work tasks into specialised processes there is an enormous potential for further increases in productivity (increasing returns) which characterise the commercial mode of subsistence.

Even pin making is now made by one or two plants where in Smith’s days there were hundreds because automation replaced labour in pin-making. Now a few operators manage batches of machines doing all the 18-steps in the original process (but their machines are fabricated in scores of specialised plants located elsewhere, and their inputs are subject to increasing returns in their own right).

The division of labour is not confined artificially to one process in one factory. It is continually being propelled by innovation and adaptation across whole industries, quite separate from each other, that reduce unit costs in as many ways in products, that being incorporated in lower prices alter the processes wherever the products are inputs. Allyn Young (Economic Journal, 1928) described this process as ‘cumulative’ and it characterises modern manufacturing, and makes modern capitalism the productive force that it is.

Knowledge is dispersed, not reduced. The fact that there are four AER journals in place of one is not support for Chris Farris’s error; quite the opposite. Each author knows a great deal about a small specialist area, true, but together all authors know a great deal about more and more, not less and less. And this is only a single journal, admittedly one that specialises in mathematical abstractions about a fantasy state of general equilibrium, but there are thousands and thousands of other scholarly journals, which most people do not have time to read more than the titles of the articles in them. They don’t need to, but they know where to look if they did.

We are not in a state of ignorance; we would be if all the scientific work was absent.

November Lost Legacy Prize Won By Greg Blankenship of the Illinois Policy Institute

What a great deal of good sense Greg Blankenship writes on Adam Smith in the Chicago Daily Observer, 19 November, (here).

This man, writing in the very home of the mythical, make-believe Adam Smith from Chicago, makes an outstanding case for the views of the real Adam Smith, from Kirkcaldy. It’s a pleasure to read.

Greg Blankenship, President of the Illinois Policy Institute, is outright winner of the Adam Smith’s Lost Legacy Prize for November (and a hot candidate for the annual prize too)’.

His piece is entitled: “The Left Mis-Uses Adam Smith to Their Own Purposes” and opens with:

“He may be the father of modern economics, or perhaps the father of social science but to call Adam Smith the father of capitalism – as one close colleague puts it – is like calling Sir Isaac Newton the father of gravity. Newton didn’t invent gravity; he just figured it out. Ditto for Smith.”

He continues:

‘Capitalism was a term coined by Karl Marx to demean liberty and free markets. By labeling free markets as an ideology – rather than an empirical observation (the methodology of the Anglo-Scottish Enlightenment) into what was occurring in Smith’s world – it was hoped that the reality that Smith uncovered could be overthrown and replaced with a new vision of what the world ought to be like in the minds of the people who, of course, would run it.”

He tackles the vexed question of progressive income taxes, in favour of which Adam Smith is often called into evidence for the prosecution by the left, and he takes to task one Ralph Martire, a fellow columnist on the Chicago Daily Observer, for his lumping of Adam Smith’s views about progressive taxation on luxury consumption goods, house rents and the carriage of luxuries.

The tactic hasn’t been lost on fellow travelers of the local sort, either. Recently on this very site Ralph Martire wrote:

“That’s not only unfair, it also contravenes sound, capitalist tax policy, as conceived by the father of capitalism, Adam Smith. Smith contended tax burden ought to be progressive in a capitalist economy—i.e. impose a greater burden on the affluent than everyone else, because under capitalism the affluent will always receive a disproportionately greater share of economic growth.”

While Martire is correct that Smith was for progressive taxes, but is ‘disingenuous at best in applying progressivity to income taxes. This is because Adam Smith rejected income taxes as, “absurd and destructive” ’.

Adam Smith continues with examples of the bad effects of progressive income taxes in Wealth Of Nations, Book V Article III, ‘Taxes upon the Wages of Labour’ (pp 864-67). To which Greg Blankenship comments:

‘Adam Smith’s idea of progressivity was that people who purchase luxury items such as a carriage should pay more in taxes for that purchase than a dirt farmer buying a wagon. Necessities of life should be taxed less than luxury items. Smith also believed that property was better source of taxation and than taxing capital, stock or production. Again, this is totally at odds with Ralph Martire’s vision of tax reform.’

‘The real lesson of Adam Smith isn’t in his maxims on taxation or his discussion on public education. The real lesson is Smith’s commitment to natural liberty and that government wasn’t the solution, it was the problem.’

Every reader should read Greg Blankenship’s article in the Chicago Daily Observer (here).

It’s the best thing to have been written about Adam Smith’s real ideas this month (and perhaps a few others too).

Strange Claim That in Adam Smith's Day 'The Great Majority Had Landed Estates'!

Kent Welton writes in Op-Ed News.com (here):‘Enclosure, Capitalism & The "Kiss My Ass" Farm’

He includes this passage:

‘Nevertheless, the very nature of the "free market" has greatly changed from the days of John Locke and Adam Smith. No longer does the great majority have a landed estate and a once far more common natural independence allowing for a truly fair relations between capital and labor.’

Comment
When did the ‘great majority have a landed estate’?

In the 18th Century? In Britain? In ‘the days of John Locke and Adam Smith? No, Kidding!

The great majority lived on subsistence wages, had no land, could graze a pig or a cow, if they had one, on the commons, and had no political rights, no health services, couldn’t read or write – many men could in Scotland, due to the ‘little schools’ in every parish; but girls and women were left out of schooling - and in England were by law tied to their parish and couldn’t seek work legally elsewhere.

Yes, it has certainly changed since Adam Smith’s days. for the better! The poor are incomparably better off materially (the rest of the world’s really poor take great risks to try to get into Britain and North America to share their ‘poverty’).

Is there a parallel universe that Kent Welton has slipped here from? Is he trying to slip out of the USA to a better place?

An Unreconstructed Marxist Opines on China

George Walden writes in Blomberg a fiesty piece, ‘Adam Smith Goes to China, Marxists Cheer in Dodgy New Orthodoxy’ (here).

‘Giovanni Arrighi, a sociology professor at Johns Hopkins University in Baltimore, has written a book that I fear could become the new orthodoxy on China’ [apparently Arrighi is a Marxist; unreconstructed too, it seems]:

‘No one should be surprised that the center of economic gravity is shifting from America to Asia, [Arrighi, ] argues. Already in the 18th century, Adam Smith wrote in ``The Wealth of Nations'' that China was following a ``natural'' path to development, concentrating on agriculture before industry and international trade. This Arrighi describes as an alternative path to opulence.

In fact, the Scottish economist also wrote that China's failure to open its ports robbed the country of foreign machinery and techniques, restricting its manufacturing capacities. Arrighi waves this aside, underlining instead that Europe's emphasis on trade caused the West to develop in what Smith called an ``unnatural'' way.’

Comment
What Adam Smith said about China (extract from my 'Adam Smith' manuscript):

‘He didn’t appear to consider [Britain reaching its ‘full complement of riches’] a likely contingency at any time soon, but he accepted that ‘China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions’, adding, tellingly:

‘But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation, might admit of’.

How Giovanni Arrighi interprets this as ‘an alternative path to opulence’ is baffling. Some alternative path; some opulence! The following two centuries must have seemed idyllic to China’s people under the Emperors, the War Lords and finally Mao ZseDong and his Marxist experiment! (But no opulence.)

Adam Smith also said that ‘other laws and institutions, the nature of its soil, climate, and situation might’ produce a superior complement of riches. He outlined what he meant by the ‘nature and its laws and institutions’ in 18th-century China:

‘In a country too where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scare any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by inferior mandarines, the quantity of stock employed in all the different branches of business transacted within it, can never be equal to what the nature and the extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.’ [WN I.ix.15: pp 111-12]

A New Blog on the Block - to cheer you up

I visited Café Hayek, as I usually do daily, and found Don Boudreaux recommending a new Blog, ‘It’s getting better all the time’, written by Manoj Padki, whose strapline is: “I believe that life is getting better all the time - and this blog is going to document news about this continual progress in human living standards and quality of life. Please send me links to such news items.”

So I took a look and found nice, nippy short pieces on Manoj Padki’s theme, all based on data, not wishful thinking.

You can find it here.

It’s worth a try, so I bookmarked it. Thanks Don. With all the bad news around, I need something to cheer me up.

Edmund Burke and Adam Smith: how conservative were they?

Frederick Dreyer (professor emeritus, Department of History, University of Western Ontario), writes a high-quality article in National Post (Canada), “Taking the full measure of Edmund Burke” (here), is in complete contrast to the flippancy of George Jonas (see below).

Frederick Dreyer discusses the ‘conservatism’ of Edmund Burke and highlights his differences with a rival politician, Richard Price:

“Price was a man of great versatility, and among his many accomplishments, he had written an important book on moral philosophy, Review of the Principal Questions in Morals. (It is still in print today.) To oversimplify matters somewhat, Price's argument is that it is our faculty of reason that allows us to tell right from wrong: "Reason is the natural and authoritative guide of a rational being." Much of what Burke wrote in the Reflections is an implicit attack on Price's moral philosophy. In condemning reason, it is not Voltaire and Rousseau he had in mind, but Richard Price.

In making this attack, Burke drew heavily on another theory of moral philosophy, one that discounted the importance of reason in our moral judgements and stressed the importance of our natural passions. This is the Theory of Moral Sentiments written by his contemporary, Adam Smith. Burke was an uncritical fan of Smith's work. "I am not only pleased with the ingenuity of your theory," he wrote to Smith. "I am convinced of its solidity and truth; and I do not know that it ever cost me less trouble to admit so many things to which I had been a stranger before."

It's a fair guess that the Burke who adored the Theory of Moral Sentiments had no objections to the Wealth of Nations. There is nothing in the Reflections that might not have been written by Smith. Nor is there anything in Burke's collected writings that disagrees with Smith.

Though I think it likely that Burke read the Wealth of Nations, it is not something we can prove. But we can prove perhaps his agreement with it. This is evident from his Thoughts and Details on Scarcity, in which he argues against the government's management of the food trade: "To provide for us in our necessities is not in the power of government. It would be a vain presumption in statesmen to think they can do it. The people maintain them, and not they the people."

It sounds like Smith, doesn't it? If Burke is the classic conservative, then conservatives have no cause to be ashamed of capitalism.”

Comment
Richard price says: "Reason is the natural and authoritative guide of a rational being", which is plainly non-Smithian, and given Burke’s praise for Smith’s ‘Theory of Moral Sentiments’ when it was published in 1759, it is not something that Burke would agree with.

Frederick Dreyer asks a question of which I had not thought about because I assumed that he had read Wealth Of Nations: did ‘Burke read the Wealth of Nations?

It is not as if he could really miss it, given his parliamentary interests and his interests in the American rebellion, of which Adam Smith had much to say about in his critique of colonialism as a mercantile project that was detrimental to British interests in its economy and in its cost (£170 millions pent in wars defending the colonies against France).

However, I would draw attention to the fact that whether Burke read Wealth of Nations is perhaps less important than whether he agreed with Adam Smith’s critique of mercantile political economy, the main purpose embedded in Smith’s work.

Certainly, Edmund Burke sought to distance himself from Adam Smith’s political economy in the years after Smith died in 1790. With his interest in the French revolution, Burke was conscious of the dangers inherent in the French Terror and his highly conservative anti-French discourse attacked many of the friends and associates of Smith.

In Emma Rothschild’s ‘Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment (Harvard, 2001, Chapter 2, pp 52-72: “Adam Smith and Conservative Economics”) there is an excellent discussion of events around this period, during which Adam Smith’s name and his Wealth Of Nations were regarded with deep suspicion by the Establishment, and prominent individuals who were associated with ‘French’ ideas were put on trial for using language not all that much different than Adam Smith used in reference to some aspects of government policy and public finance.

I recommend that you read Frederick Dreyer’s article here and Emma Rothschild’s Economic Sentiments.

Sunday Invisible Hand no 373

George Jonas writes a piece (more of a muddled rant) on “The bovine-conservatives” (don’t ask) in National Post, a Canadian paper, here.

“When the great new ideas of liberal democracy, lasseiz-faire capitalism, and Western-style individualism appeared on the world’s stage, some even-toed ungulates couldn’t stand or fathom Adam Smith’s “invisible hand” guiding society’s affairs. These frank counterrevolutionaries preferred the visible hand of royal masters, like Louis “l’État, c’est moi” XIV. They resisted free enterprise as unabashed feudalists or royalists.”

Comment
To take this seriously for a moment, it is most unlikely that ‘even-toed ungulates’ (a hoofed mammal) ‘couldn’t stand or fathom Adam Smith’s “invisible hand”.

The use of this metaphor was deep into Book IV of ‘Wealth Of Nations’ (p 456) and was hardly noticed by anybody until the 20th century when modern economists picked it out, brushed it down its dust, and turned it into a mysterious, even hinting at this ‘miraculous’ force for making even the most unlikely self-interested business polluter, monopolist, and anti-social employer into a social beneficiary, whose beneficence was as invisible as the disembodied part supposedly guiding him.

Otherwise it is a Sunday nonsense.

My Review of Dani Rodrik's 'One Economics: Part 2

Dani Rodrik tackles the institutional question in chapter 6 (‘Getting Institutions Right’), which is crucial given that the Washington Consensus (as amended) has gotten it wrong, quite wrong, over the years since it held sway over international development.

He contrasts a country (the post-soviet Russia) with a high degree of legal private property rights that most entrepreneurs didn’t trust enough to take full advantage of their assumed primacy in development, with a country (Communist China) without significant property rights, dominated by the state that had significant positive responses to development at the local level. He asserts, unfortunately ‘the empirical literature does not tell us how that safety [where investors feel safe] is attained, only that it matters a lot’ (page 189). This leads to him concluding that the ‘best we can do as analysts is to come up with contingent correlations that are contingent on the prevailing characteristics of the local economy’ (p 190).

One size does not fit all. That should be written on every wall where development economists are at work. Homo economicus is not ‘alive and well’ across all economies, because homo sapiens live in all kinds of circumstances and institutions and they are not independent rational maximisers acting in concert, as they can’t when dealing with their dependence on others. Ration theories of individual maximisation of utilities or whatever do not cope well when two or more individuals are in conflict.

When Dani Rodrik moves onto discussing the complexities of globalisation would benefit from his re-reading Wealth Of Nations, especially Book IV. Rodrik writes:

‘Investment portfolios in the advanced industrial countries typically exhibit large amounts of “home bias”; that is, people invest a higher proportion of assets in their own countries than the principles of asset diversification would seem to suggest’ (p 197).

Adam Smith wrote about this in the chapter that includes the (in)famous metaphor of ‘an invisible hand’ (WN IV.ii: pp 452-72). The preference of a wholesale merchants is to ‘naturally prefer the home trade to the foreign trade of consumption’ (WN p 454) … ‘Upon equal or nearly equal profits, therefore, every individual naturally inclines to employ, his capital in a manner in which it is likely to afford the greatest support for domestick industry, and to give revenue and employment to the greatest number of people of his own country’ (WN p 455). And as the arithmetic whole is the sum of its parts, this necessarily renders the revenue of society greater than it would be if merchants dispersed their capital abroad.

Why do merchants behave this way and do not send more of their capital abroad as investments or in joint ventures? Risk aversion among merchants:

‘[The merchant] can know better the character and the situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress’ (WN p 454). This means he has ‘some part of his capital always under his own view and command’ (WN pp 454-5); ‘he saves himself the risk and trouble of exportation’ (WN p 455); and his home capitals continually circulate at home ‘and towards which they are always tending’, except when they are sometimes ‘driven off and repelled from it’ (WN p 455).

In short, it is from the intention ‘only of his own security’ that he directs his capital in this manner (WN p 456). This behaviour necessarily increases domestic capital formation higher than it would otherwise be if they were not so risk averse about foreign ventures. Whether this is advantageous if its curbs foreign trade or whether domestic tariffs are appropriate in giving a monopoly to the domestic trade is an open question.

Dani Rodrik’s analysis of the consequences of the trade biases of globalisation (chapters 7, 8, and 9) are an excellent summary of the issues that dominate the present debate and they add to the unresolved problems for development of the poorer countries, fragmented as they are in any list of performance indicators.

That the missing element in all of these discussions is the failure of mainstream neoclassical economics to produce policies that actually worked over a 50 year period is worrying for the profession.

This does not mean that there were better alternative theories or practical policies on hand, but that is of little comfort, because by general consent the ‘best and the brightest’ graduates and tutors in large numbers have been concentrated in economics departments monopolised by mainstream neoclassical economics and in a constant drift away from the real world; finding comfort in their abstract worlds and assumptions.

That Dani Rodrik raises the ‘home bias’ of investment portfolios, as if it is a new issue for the 21st century, 231 years after Adam Smith wrote about it in Wealth Of Nations – and not in an obscure chapter, because a metaphor from it is probably more quoted, more often, and in more textbooks, refereed articles, theses, dissertations and media outlets (and wrongly, to boot) than anything from any other chapter – is evidence that the narrow vision of modern economics has costs, particularly in those countries imposed upon with wrong policies.

Adam Smith commented on his contemporary economists (Dr Quesnay and his Physiocratic colleagues) who:

‘seem to have entertained a notion of the same kind concerning the political body that it would thrive and prosper only under a certain precise regime, 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 economy, in some degree, both partial and oppressive. Such a political economy, 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’ (WN IV.ix.28: p
674).

It doesn’t take a close reading of Wealth Of Nations (though I would recommend a close reading for all professional economists) to realise that Adam Smith dealt with the real world in all of its diversitry, the known history of its parts and the very real policies applied by real governments.

He didn’t assume that a single frame of reference applied to all economies and neither did he believe that the entire world or a country within it had to brazenly change everything in order to change some of the worst vestige of centuries of errors. In Britain’s case he was quite ready to accept that there would not be a total overhaul of every aspect of its society (inlcuding in matters of free trade); it could proceed to opulence (development) with more than a few flaws in terms of the philosophy of Natural Liberty, and with many flaws in its economic structures.

When I was reading Dani Rodik’s chapters on the varied performances of different systems of government and different structures of their economies, why was I not in the least surprised by many of his comments of the ‘surprising’ gains in the more unpromising political systems and disappointments in those closer to the democratic plurality we have in the West?

That’s Smithian political economy at work and not the perfection of political-economic structures that are assumed by those who advise the World Bank, the IMF and development departments in Western governments.

I certainly enjoyed reading Dani Rodrik’s ‘One Economics, Many Recipes’ (Prineton University Press), both for the message that mainstream economics recognises its past limitations (not to say its outright errors in policy making) of the Washington Consensus, and for confirming that critics of those wrong policies that ignored, and on occasion rode over the objections of knowledgeable local people, were right about adapting changes consistent with their histories and current realities, and not imposing neoclassical assumptions on unsuitable candidates for their failed experiments.

My Review of Dani Rodrik's 'One Economics': Part 1

Dani Rodrik’s theme is distinctive. He makes the obligatory genuflection to his on-message credentials (if he didn’t, he would not get the hearing he seeks in the mainstream economics profession who run and influence the decision makers about these things) in clarifying his adherence to ‘neoclassical economic analysis’. Which he sums as ‘social phenomena can be understood by considering them to be an aggregation of purposeful behaviour by individuals … interacting with each other and acting under the constraints that their environment imposes’(p 3).

His definition neatly encapsulates his theme; he doesn’t consider that the Washington Consensus properly takes account of the ‘constraints that their environment imposes’ in the cases of many of the developing countries, which are a disparate bunch to say the least.

The Washington Consensus consists of rules of good behaviour necessary for promoting economic growth – one size fits all- set out in Fig 1, ten original rules plus ten augmented rules. Briefly, the facts appear to show, of which Dani Rodrik provides detailed analysis, that in practice their application over 50 years has proved disappointing to say the least. Those countries that accepted the rules and applied them have fared less well than those that didn’t, or rather, some of those that didn’t did much better than others that didn’t and those that did (Chapter 1).

His excellent Chapter 2 on Growth Diagnostics is on how to analyse growth performance in developing countries (especially Fig 2.1) and applies it to three countries Brazil, Dominican Republic and El Salvador. This usefully unpicks their differences (broadly their ‘environment’). I think Dani Rodrik shows that using these tools as a ‘way of thinking’ about a reform agenda is much more productive that merely ticking the 10 or 20 boxes associated with the Washington Consensus and tackling the unticked boxes with imposed reforms from the ‘one size fits all’ approach to growth and development.

Chapter 3 discusses industrial policy for the 21st century, and this means confronting the usual polar views on market and government failure and the imposed views of international bodies like the IMF and the World Bank. Dani Rodrik supports his survey with two long tables, Tables 4.2 and 4.4 (pp 122-47). The conclusions are not flattering to optimism that they work, nor necessarily encouraging of their detractors. For instance, Dani Rodrik lists six assertions (p 150) that the can’t work, included such as ‘governments cannot pick winners’, ‘prone to political capture and corruption’, ‘there is little evidence that industrial policies work’, and six assertions that they can be made to work (pp 150-51).

Dani Rodrik concludes that ‘industrial policy is a process of economic self-discovery in the broader sense. The right image to carry in one’s head is not of omniscient planners who can intervene with the first-best Pigovian subsidies to internalise any and all externalities, but of an interactive process of strategic co-operation between the private and public sectors that, on the one hand, serves to elicit information on business opportunities and constraints, and on the other hand, generates policy initiatives in response’ (p 151).

Chapter 5 discusses the kinds of institutions that would facilitate ‘high-quality growth’. He opens with discovering that homo economicus is ‘alive and well’ (memories of George Stigler on Adam Smith being ‘alive and well and living in Chicago’ crossed my mind) wherever development policies have worked, that is wherever ‘price incentives are able to operate', from which he concludes that ‘neoclassical economic analysis has much to contribute to development policy’, but qualifies this (contentious) assertion with the observation that exponents of this view ‘led for a while what was perhaps an excessive focus on relative prices’.

If homo economicus was ‘alive and well’ in some successful developing countries, the species was not prevalent elsewhere that needed them most. And in fact, as Dani Rodrik’s segmented data shows, those developing countries that succeeded did not conform to the neoclassical economic paradigm of open economies (South Korea, Taiwan, Japan, Malaysia, Singapore). And neither did those countries that applied the policies that failed do so well (South America, Africa).

Dani Rodrik blames the ‘absence of adequate institutions’, which I would have thought should have been noticed before the neoclassical treatment was assumed to work. And that’s the problem that Dani Rodrik keeps coming up against: neoclassical economics does not take account of the absence of ‘adequate institution’ because its models assume that they exist, even though the slightest acquaintance with such countries would reveal their absence (they did visit them, didn’t they – what do you mean they didn’t!).

His discussion on pages 156-61 of what constitutes ‘adequate institution’ is a welcome acknowledgement of what for 50 years has been ignored by the international institutions and neoclassical economists in the developed countries national institutions charged with promoting development.

[I shall break off here and continue later as I have other pressing tasks to complete today. I will continue with summarising Dani Rodrik's excellent book and commenting from a Smithian viewpoint.]

Crooked Timber Debate on Dani Rodrik's New Book a Disappointment to Me

I have found the discussion on Crooked Timber about Dani Rodrik's new book, 'One Economics, Many Recipes' (Princeton University Press) disappointing in the comments the contributors have attracted.

Also, the format of the debate is awkward. Reading each contributor's piece (all published together) on Dani Rodrik's book one after the other, then reading the comments to each one, the plot is lost. They should have been published separately – say, daily – and I am not sure the commentators to each piece have read the same book or they have lost Dani Rodrik's 'big picture' (they've certainly lost me).

I shall, instead, finish my own reading of the book and then make a comment, possibly in a couple of posts. This will include a summary of Dani Rodrik’s thesis.

[I tried to post this yesterday but following a 5 hour power cut froma fire at a substation in Edinburgh, my computer is still recovering and is not working properly. Fingers crossed.]

Dani Rodrik's Welcome Analysis of the Deficiencies of Modern Economics When its Exponents Ignore Institutions

Dani Rodrik’s new book, One Economics, Many Recipes: global institutions, and economic growth, (Princeton University Press) has attracted interesting comments on several Blogs. I had intended to contribute some views earlier, but my temporary absence for a couple of days altered those plans.

I would like to comment on some preliminary issues raised by Dani Rodrik though and perhaps follow up with a longer assessment later. An oline seminar was sponsored by Crooked Timber (here) introduced by Henry Farrel, and includes some leading economists as guest contributors: David Warsh, who runs Economic Principals (here); Dan Dresner (here); Mark Thoma's Economist’s View, a leading economics Blogger(here); Jack Knight (author of Institutions and Social Conflict); Adam Przeworski;(">here).

Their contributions to the seminar are published at Crooked Timber, plus the numerous comments each contributor has received.

It is also advised that you read Dani Rodrik’s One Economics, Many Recipes ($27.44 from Amazon US; £16.60 from Amazon UK). It addresses current issues in development – why are the performances of many countries so variable; what does this suggest for the various policies advised by neoclassical economists, particularly in the Washington Consensus, and what conclusions might be drawn from this situation?

Dani Rodrik passes the insider test of being an accomplished neoclassical economist and he never strays too far from its reference points in modern theories of economics. However, he certainly is not a purist when it comes to the application of economic theory to real world problems.

Without shaking the foundations of modern theories his book raises very interesting questions about the strict application of pure theory to the problems his book addresses, and about the relative non-success of neoclassical theories, or more correctly the assumptions on which their application is based, pointing out the weakness that the institutional assumptions of competition, rule of law, efficient political structures, legislative honesty and stability, often do not obtain in the countries which try to apply the Washington Consensus under advice from the World Bank, and others.

What is more, some of the success stories of recent growth and development do not conform to the implied free market models (China, India, Vietnam) and neither did the earlier successes of South Korea, Taiwan, Malaysia, Singapore and Hong King.

So how come? That is what interested me in reading these chapters.

Not surprisingly, to readers of Lost Legacy, I could not help but contrast how Adam Smith saw economic development in Wealth Of Nations and wondered what his work could contribute to such a discussion. It is to this subject that I wish to make a contribution, and shall do over the next few days.

I would post these ideas on Crooked Timber, but feel somewhat chastened for contributing, apparently, too often on the earlier debate on Greg Clark’s, A Farewell to Alms (Princeton University Press), on Marginal Revolution a couple of months’ back.

A Critic Strikes Back

Raul Ramos y Sanchez, an author, responds to my piece on Monday about his post discussing immigration into the USA. Here is a letter posted as a comment:

Mr. Kennedy,
Methinks thou doth protest too much. Adam Smith’s invisible hand has become a widely used metaphor to describe the power of the marketplace -- not as a specific reference to the works of Adam Smith. The fact you have spotted this reference 371 times should be a clue. Do you also get your knickers in a twist when someone uses “Dickensian” or “Orwellian” as an adjective? C’mon, Gavin. Give today’s writers a break.
Raul Ramos y Sanchez

Comment
Hi Paul

If any metaphor is appropriate in a different context, writers of course, are perfectly entitled to use it, and they also have a perfect artistic right to use it inappropriately. If it isn’t appropriate, then critics have a duty to point this out.

Your statement:
‘Adam Smith’s invisible hand has become a widely used metaphor to describe the power of the marketplace -- not as a specific reference to the works of Adam Smith.’

Part of the statement is factually true: It has ‘become a widely used metaphor’. That is not the gist of my comment.

This is ‘Lost Legacy’, a Blog dedicated to clarifying Adam Smith’s actual legacy in his works. In so far as modern economists, mainly from the mid-20th century, most of whom admit to never having read Wealth Of Nations, have adopted a single metaphor and attached it to something he never used it for is something that I think is relevant for Lost Legacy to comment upon.

Adam Smith’s use of the metaphor was hardly noticed by his readers while he was alive, or throughout the 19th century when his works were actually still read by political economists.

The rest of your sentence is a perfect illustration of the misuse of the metaphor: ‘Adam Smith’s invisible hand’ to ‘describe the power of the marketplace’. Now, Adam Smith didn’t use the metaphor remotely for this purpose.

He described the ‘power of the marketplace’ in Books I and II of Wealth Of Nations and there is no mention of ‘an invisible hand’ at work or lurking around, yet the use of the metaphor (and in your case too) implies that he viewed markets operating in such a manner. After all, his analysis centred on markets, yet there is no mention of them requiring a mystical disembodied entity that was a common metaphor in literature of the time.

The ‘power of the market place’ does not need to use such a metaphor and Adam Smith apparently agreed because he didn’t use in that way.

Here are some contemporary uses of the metaphor of an invisible hand:

Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him on with exceeding mighty hand’;
Horace (65-8 BC), Ovid (Metamorphoses, 8 AD): ‘twisted and plied his invisible hand, inflicting wound within wound’;
Lactantius (De divinio praemio, 250-325): ‘invisibilis’ ;
Augustine, 354-430, “God’s ‘hand’ is his power, which moves visible things by invisible means’ (Concerning the City of God, xii, 24);
Shakespeare, ‘Thy Bloody and Invisible Hand’, (Macbeth, 2.3; 1605);
Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723);
Nicolas Lenglet Dufesnoy said that an “invisible hand” has power over “what happens under our eyes”;
Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;
Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;
Jean-Baptiste Robinet (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”.
Voltaire (1694-1178) in Oedipe (1718) writes: “Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’;
Kant (1784) ‘Universal History’: ‘leads on to infer the design of a wise creator and not [the hand of a malicious spirit]’, p 39.

I am not objecting to you using any metaphor in your composition; I am objecting to you calling it Adam Smith’s metaphor when a), it wasn’t his at all – those above include very famous ealier and contemporary writers; and when b), it is calumny in direct contradiction to his theory of markets.

However, it suits modern economists whose abstract mathematical models of markets are given some sort of endorsement by associating the power of Adam Smith’s name with the alleged validity of their models.

Why not use Shakespeare’s metaphor, or Defoe’s metaphor, which in common with Adam Smith, had nothing to do with markets?

As for “Dickensian” or “Orwellian” as adjectives, it would depend on the contexts. To write of “Adolph Hitler’s Christ-like aura” would be inappropriate, I suggest, and that might provoke many people, perhaps yourself too, to get ‘their knickers in a twist’; in some religions it would provoke degrees of violence.

My comments were precisely that: comments and, appropriate, on Adam Smith’s Lost Legacy.

I hope you are pleased, though, that a few hundred more hits may take place from my mention, with a link in the original post below, on Lost Legacy, by readers who will read your piece on immigration into the US.

Regards

Gavin

Sophistpundit Links to Lost Legacy's Post on Elizabethan Guilds

Adam Gurri of Sophistpundit (‘self consciously pretentious since 16 November, 2004’) posts a report (here) of Lost Legacy’s, ‘Was Galbraith a Good Historian?’, from Wednesday 12 November posts, in ‘Did Elizabethan Guilds Promote General Opulence?’.

It’s always encouraging when other Blogs refer to our posts and we always welcome them for doing so (critical or otherwise).

Invisible Hand no 371

IMPORTANT NOTICE

ADAM SMITH’S LOST LEGACY HAS BEEN MOVED BY “BLOGGER”, THE HOST SITE, TO A NEW ADDRESS:

www.adamsmithslostlegacy.blogspot.co.uk

TO FOLLOW ALL 2083 POSTS (AND COUNTNG) FROM HERE TO 2012 AND BEYOND, PLEASE USE THE NEW ADDRESS.

THANK YOU

Gavin Kennedy

Raul Ramos y Sanchez, an author, writes a Blog: Author’s Diary (here)

He joins a debate on immigration into the USA (of which I am neutral, not voting there) and includes this gem:

“A look at our planet from space shows no national borders. Examine a fifty-year-old globe and it becomes apparent that sovereign boundaries are illusions that change over time. What we are seeing today is Adam Smith’s invisible hand redrawing the map of our hemisphere.”

Comment
Whatever is ‘redrawing the map of our hemisphere’ it has absolutely nothing to do with “Adam Smith’s invisible hand”.

There were no boundaries when the continent’s first migrant invaders arrived across from North Asia, or the second, third and fourth waves moved in, some of them stopping in what we call Mexico.

Native Americans came from Asia; Europeans from Europe, and the rest from all over, some voluntarily, others as slaves. The USA is a land of immigrants.

None of them were driven by invisible body parts, unless the metaphor has been given a life of its own.

In Adam Smith’s case, the metaphor was about the risk avoidance of traders preferring to invest locally than in distance sales and abroad, and specifically refers to the whole being the sum of its parts, in that each individual’s decision to invest locally to lower their risks, meant that the amount of local investment was higher, which had beneficial outcomes for the local economy.

It’s not clear what the metaphor added to Adam Smith's analysis of the process – it certainly did not make much any sense of what happened and which motivations caused it.

As a mere rhetorical flourish, he used a literary metaphor, common enough in the 17th and 18th centuries (Shapespeare used it too) to be used widely (see my paper: 'Adam Smith and the Invisible Hand', June 2007, which is available free as an electronic file from Lost Legacy), but was given a new lease of life in the 20th century by neoclassical economists and a meaning never intended by Adam Smith.

Unavoidably Absent until Wednesday Evening

I may not blog at all from today until late Wednesday evening (GMT) due to a stay in hospital for an examination procedure.

Apologies, but when the medics get hold of you, there is no choice!

I'll get an insight into the National Health Service, which from some conservative Blogs I read, some call it 'socialised medicine', and many criticise it as bureaucratic, wasteful and too big.

The 'proof of the pudding' springs to mind! I'll contemplate on Adam Smith's view that the 18th century government ought to use public resources to combat the effect of 'noxious diseases' (Book V).

Gavin

Was Galbraith a Good Historian?

History News Network here Carol V. Hamilton asks: ‘Is David Brooks a Good Historian?’ (11 November):

“In his New York Times columns, David Brooks often makes confident, if glancing, references to American and European history and historical figures. Too often these allusions are problematic, closer to received ideas than informed historical opinions.

On May 8, 2007, for example, Brooks wrote, “Adam Smith put his faith in the collective judgment of the market.” This is a gross simplification of Smith’s work; all the average Republican seems to know about it is the “invisible hand” metaphor. In Liberalism John Gray refers to Smith as “one of the great classical liberals,” calling attention to Smith’s support for “a constitutional order in which civil and political liberties are guaranteed.”

And John Kenneth Galbraith observed:

‘Adam Smith detected a dismaying tendency for sellers to combine in order to raise prices and thus destroy the regulatory power of the market. He was also very suspicious of joint stock companies, now called corporations, which, besides being strongly inclined to monopoly, he also thought not very efficient. He would have allowed them only a limited range of large tasks. Many people who now yearn to resurrect Smith will find him a scathing enemy if they succeed.’ (John Kenneth Galbraith, Almost Everyone’s Guide to Economics, 14-15.)

She concludes:

“Historical figures like Lincoln, Hamilton, and Adam Smith are not baseball cards to be collected as if they were members of one’s favorite team. They are complicated, even self-contradictory, and their conventional reputations rarely match up with their biographical complexity.”

Comment
Carol Hamilton’s broad point is accepted and applies accurately to Adam Smith (I cannot speak with authority about her examples from Lincoln and Jefferson).

That ‘all the average Republican seems to know about [Adam Smith] is the “invisible hand” metaphor’, sadly, would also broadly apply to most of the media and a fair majority of modern economists, including many on campuses.

The sentence she quotes from John Gabraith: [Adam Smith] ‘was also very suspicious of joint stock companies, now called corporations, which, besides being strongly inclined to monopoly, he also thought not very efficient’ is problematic, given we, and he, could access the Wealth Of Nations and read Book V with relative ease.

Such a short read would show that his ‘suspicions’ were focused on a particular type of joint stock company, the chartered trading companies which were given legal monopolies of trade with distant territories. The particular case in which Adam Smith's ire was inflamed was that of the East India Company, formed in 1600, and in possession of an exclusive monopoly of British trade to and from India.

He found the East India Company riddled with pernicious practices, cruel and oppressive government, military force for conquest and not for the defence of trading posts, corruption on a grand scale, reaching down to lowly clerks trading ‘on their own account’, and the zealous protection of its monopoly against all comers, including foreign traders with India (itself causing frequent acts of war). Other chartered trading companies were ‘useless’, despite their legal monopolies.

The polemic is strong but ought not to obscure the fact that his criticism of the organisational structure of joint-stock trading companies did not extend to all joint stock companies. He recommended them for such activities as banks, citing in particular the Bank of England, the Bank of Scotland and the Royal Bank of Scotland (all still profitably trading today without the whiff of corruption, nor the stench, of corruption and scandal). They were also highly efficient as well as being honest and did not have exclusive monopolies in their fields of business.

He also recommended joint-stock companies for activities like the insurance industry and canals; the need for vast capitals to run these companies successfully made the joint stock arrangements necessary.

Galbraith had claims to being a historical scholar and he should have noted what Adam Smith actually wrote and not, mischievously extended his critique of the chartered joint-stock companies, formed by Royal Warrant or Act of Parliament, and not a little flow of funds between their sponsors, legislators, and the sovereign or those who influenced them, to modern corporations formed from over a century later (which were the real target of Galbraith's writings.

Words sometimes change their meaning over the centuries and ‘corporation’ is one of them. That’s why I refer to the non-recognition by disintuished scholars of these changing meanings as ‘mischievous’. To find it in Galbraith’s writings suggests that Carol Vanderveer Hamilton’s title could be changed from, ‘Is David Brooks a Good Historian?’ to how good an historian was John K. Galbraith?