Wednesday, January 31, 2007

I Shouldn't Mess With Trial Lawyers

I posted yesterday a gentle ribbing of a hot-shot US trial lawyer over his Blog’s views asserting that Adam Smith did not favour public funding of certain commercial activities, which, of course, is not quite the truth, the whole truth and nothing but the truth.

Well, as I feared the defence lawyer (or maybe he’s ambidextrous and is also a prosecuting lawyer) came back with that penetrating advocacy for which they are rich and infamous. He brought on a star witness, not to refute my testimony, the details of which are bankable (I heard a tv lawyer say that once; true he turned out to be the principle villain, as we call London gangsters); no, he used as his character witness for his defence a scene from an Homer Simpson’s episode in which his rallying cry was ‘No Comeuppance’ (Exhibit 96, see:

“Professor Gavin Kennedy, an eminent British economist [Editor: Now steady on, old chap, let’s not take the, er, Michael] and authority on Adam Smith, gently points out that the author of The Wealth of Nations actually favored some kinds of "meddling with market forces".

“But Blawgletter and Professor Kennedy will part as friends after all. For Blawgletter intended to highlight the contrast between those who believe that market forces can do no wrong (and who therefore denounce any government regulation) and those who argue that market forces can do great harm by, for example, creating monopolies, fixing prices, polluting air and water, selling unsafe products, producing vast inequality, and practicing frauds. Smith, as Professor Kennedy takes pains to illustrate, approved of government intervention to mitigate at least some of these market failures.

Blawgletter never said otherwise. No comeuppance!”


Brilliant! Game, set and match. A whitewash, much as England (the cricket team) experienced from the Aussies in the Ashes last week (don’t bother asking; I’m not sure either, living in Scotland and preferring football).

Good old Homer Simpson, the surprise last-minute witness who usually saves the day, beloved of all US Court Room dramas.

I pack my briefcase and head for the door; another battle royal for ‘freedom and justice’, as in the ‘Three Amigos’, and I wonder what tomorrow will bring? A new bag of briefs? Another desperate client? Or perhaps, another debt collector serving another warrant. Just, in case, I’ll put ‘Bruiser Barnett’s’ card in my empty wallet and see how he’ll get me off this one.

Tuesday, January 30, 2007

A Lawyer's tale of Two ideas

The connection between two ideas sometimes leads to a double error. Trial lawyers, of the business speciality are particularly admirable – at least the three lawyers I have come across, two in the US and one in the UK (admittedly I have worked with some pretty awful business lawyers in the UK, who knew a lot about the law and little about business negotiation, but that’s another story).

Lawyers also tend to be bright and articulate, so I enjoy reading their Blogs – Bruce MacEwan at: Adam Smith, Esq. is particularly entertaining and informative should you wish to sample one of the best.

Today, I came across a new Blog, Blawgletter, (‘business trial law with a sense of humour’), written by Barry Barnett, a partner in a Dallas law firm, which you will find at:

His posting shows evidence of classes in economics of the Chicago variety (he went to Yale and Harvard, so he is what we call ‘top drawer’) that spread slightly off-the-page ideas about the history of economic ideas.

Does that matter? Probably not, though you never know what you may have to formulate questions to test the credibility of someone claiming to be an ‘expert witness’ in a trial (I have watched television court room scenes, including Judge Judy, and know what leads to the ‘collapse of stout party’ as my theatre friends put it).

Here is what Barry Barnett writes under the heading: ‘Does Politics Improve Regulation?’:

At least since college, Blawgletter has admired the exquisite contradictions of government regulation, which business trial lawyers encounter all the time. Economic theory, on the one hand, teaches that any meddling with market forces -- whether by bureaucrats or private monopolists -- hurts overall "consumer welfare", the Holy Grail of economics ever since Adam Smith published The Wealth of Nations (1776).

A problem with the theory, on the other hand, results from the sad fact that we don't live in perfect world, in which perfect competition holds sway. No, things like the sugar tariff on imports of sweet, sweet sucrose; congressional subsidies for ethanol; and, yes, licensing requirements for lawyers assure that we pay more than we should for all kinds of stuff

There is a large gap between the Wealth of Nations and modern economic theory, especially that theory that alludes to the mathematics of ‘perfect competition’ and ‘general equilibrium’. On one level, neoclassical perfect competition does not replicate the real world; on the other level its exponents often pontificate in courts, and elsewhere, about policies for the real world that treat their limited mathematic models as if they have relevance for the real world, to the confusion of those involved in court cases, politics and running businesses (though the latter group are less naïve about these pretensions than the former).

Smith was not against ‘meddling with market forces’. His book critiqued such interventions when they were in support of Mercantile policies that he considered ‘absurd’, such as monopoly, protection, and conspiracies against consumers to raise prices. He also wrote in favour of extensive interventions in market forces in terms of the justice and laws protecting people’s rights and in its administration, staffing of courts, prisons and the carrying out of sentences – it was a feature of justice that a ‘public hangman’ was paid to do his duty.

It was not wise to leave to businesses such things as hallamrking, assaying bullion, stamping of cloth to guarantee the quality of its composition, etc. He favoured public interventions to secure public works in such expensive activities as the construction and maintenance of roads, harbours, canals, bridges, street lighting, paving, garbage disposal, and ‘police’, which in his day meant ensuring that adequate provisions were available in towns. He allowed for the possibility on pragmatic grounds – what worked best – that these tasks could be funded publicly and maintained by raising revenues from those who benefited. To which, of course, you can add the defence of the realm – the first duty of government, and the most expensive duty too.

In practical polices of intervention in market forces, he explicitly argued in favour of the notorious Navigation Acts that required British cargoes to be carried in British built and British manned ships, while explicitly acknowledging that this was detrimental commercially, but necessary for an island group’s defence (‘defence is more important than opulence’). I should also mention his advocacy of a publicly funded post office and a publicly funded Mint.

Perhaps his most ambitious scheme was for public education with a school in every parish, as was already common in Scotland and had been for a century, to ensure that every boy, regardless of income, (girls were not educated in this manner in those days) learned to ‘read, write and account’, and do ‘a little mechanicks and geometry’. These schools were to be funded by a mixture of public money, private subscription and charity, and parental contributions, and the teachers were not to be paid entirely from public funds or endowments, because that made them lazy and disinterested in their teaching (which is why US teachers’ unions are often disingenuous when quoting Smith’s support for ‘public schools’).

From this sketch of what Smith’s expressed views were, which does not fit the neoclassical perfect competition theory that might be presented by an opposing advocate in a trial, Barry Barnett might wish to take note of this point, and the detailed point that follow, just in case it is he who is arguing as if the Kirkcaldy Smith was akin to the Chicago Smith, so religiously taught in US colleges – ‘Holy Grail’, indeed!

If the other lawyer knows the difference between the two versions of Adam Smith, he might be delighted for Barry to carry on speaking along the lines of his Blog and await his opportunity to put up an expert witness who does know the difference.

Just a piece of friendly advice, for which I would not dream of charging Barry a fee on this occasion…

Explanation for 'light' Blogging

No posts since Saturday needs an explanation. As regular readers know I am working on a book on Adam Smith for Palgrave’s 28-volume, Great Thinkers in Economics series, and delivery time is closing in.

The book is receiving my full-time attention, with minimal time (after family duties – of which there is sufficient to keep me going) for Blogging. But I am rationing my time, not clearing issues out, such as Lost Legacy, which is related to Adam Smith (I haven’t been to Hearts play for a couple of weeks).

I shall probably post later today, assuming all is well, as I aim to finish my re-write of Chapter 8, which includes the controversies around neoclassical equilibrium and the metaphor of ‘an invisible hand’.

Saturday, January 27, 2007

What the Data Shows

Over on Carpe Diem (Mike Perry) there is a posting showing the data set that supports Tyler Cowen’s arguments that I have supported today in two posts that it is not relative poverty that is the problem, but absolute poverty.

These data show that absolute poverty (no growth) was the norm since 1AD to the 18th century after market driven commerce got under way, since then per capital incomes have grown steadily in the market developing countries. Those countries excluded by protectionism in the developed world (and self-imposed state-management in their own political structures) experience absolute and relative poverty, which is the absence of wealth creation (the annual output of the 'necessaries, conveniences and amusements of life', as Adam Smith expressed it).

Carpe Diem summarises:

"Bottom Line: Sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. Putting it in historical perspective, it makes the recent obsession with "income inequality" kind of inconsequential. It could be a lot worse, and was a lot worse throughout human history, for the average person. And complaining about income inequality in a country like the US where per capita GDP is about $42,000, must seem very strange to those in the rest of the world where per capita GDP is only $7500. Kind of like members of an exclusive, private country club complaining about differences in income between the "rich" and "super-rich" member of that club?”

Read the data set at:

Tyler Cowen is Right: Absolute Poverty kills, Not Inequality

A ‘left of centre’ Blogger manages to make an ‘ageist’, racist, ‘sexist’ and ‘tenure-ist’ slur on somebody who expresses a view with which he disagrees on ‘Angry Bear’, a Blog billed as: ‘Slightly left of centre economic commentary on news, politics, and the economy’:

“Tyler Cowen Makes Two Mistakes”

Then follows the quotation from Tyler Cowen’s posting discussed by me in my previous posting, after which we have this stunning ‘commentary’ by Steven Kyle (aka Angry bear'):

To this, I can only say that it takes a white middle aged economics professor with tenure to come up with a statement like that.... [I]n the real world [inequality] makes people distrustful of the system and causes them to lose faith in the fairness of society. General belief in the social contract is a long term asset to us all and one we should be very worried about losing. Only a very narrow view of the world could conclude otherwise...”

To which a comment is added by ‘dale’ on Brad Delong’s Blog which also posts the piece from Angry Bear:

“in the real world inequality kills”.

Angry bear has got it the wrong way round. Only a “very narrow view of the world” sees the cause of poverty to be inequality. Poverty is the absence of wealth (‘the annual output of necessaries, conveniences and amusements of life’). Poverty cannot be removed by redistribution – would that it could; what a painless solution that would be! Redistribution alleviates poverty but does not eradicate it. Indeed, in practice in the real world, redistribution on a social scale even within one country (big or small) does not eradicate poverty and it has every possibility that it will reduce inequality by making everybody worse off (except the governing elite).

Wealth is a flow, not a stock. If the flow is interfered with by wholesale confiscation, the disruption, not to say social-tension, has dramatic effects on the flow. It usually means violence, destruction of the stock of property (some of it mindless) and a switch of personnel between the formerly super rich and the former middle ranks. As the total GDP falls, it is clear that it is not the panacea that is claimed for it by militant theorists and morally indignant ‘left of centre’ commentators (who themselves – excluding the occasional saint- are, or aspire to be, ‘tenured middle-aged economics professors’, or similar ranked professionals).

The theory behind “Angry Bear’s” presumably ‘broad view of the world’ is that the super rich are the problem, even its cause, and that zero-sum redistribution will get the absolute poor out of the ghettos, slums and shanty towns of the world. If this is to be done quickly (and the depth of their feelings suggest it must be) there will be violence. Democratic institutions suggest it would be done more slowly, perhaps by penal taxation, assuming these institutions agree on how redistribution is to be implemented (and from whom to who) and from which segment of society. Redistributing all of their property would still not raise enough to make much difference to the living standards of the poorest segment, even assuming the property of the super rich could be ‘sold’ (to who?’; ‘Angry Bear’?) and the income flow parcelled up and given to families of the poor.

And what happens if after the first years of redistributed property we need to continue redistributing sufficient to make a difference? Work down the economic scale? But who is buying the depleted property stock and maintaining it from wear and tear between each round of redistribution?

Moreover, how does this help the several billion poor in the non-developing countries? Where is the wealth flow coming from to eradicate their poverty? What happens to countries and their governments which decide to opt out of Angry Bear’s plan for the eradication of world poverty (did his majority in the US democratic system get re-elected?)

Angry Bear considered that ‘inequality makes people distrustful of the system and causes them to lose faith in the fairness of society’, which is well short of the charge made in “dale’s” comment (Brad Delong’s Blog) that “in the real world inequality kills”.

You can see here the creeping drift towards extremism, a normal condition of people who believe in ‘systems’, against which Adam Smith had some sharp words in Moral Sentiments (TMS IV.11.2.10-18: pp 231-34). Angry Bear should read these passages carefully (and ‘dale’ too). They carry explicit warnings about beliefs (right or wrong, it makes little difference) being introduced that have unpleasant outcomes despite the protestations of the true believers about their good intentions, their moral credentials and the self-proclaimed certainties that they mean no harm.

Inequality does not kill; absolute poverty kills. It kills children by the millions who do not live long enough to know they are alive. It shortens the lives of people not able to draw wealth even from primitive agriculture, and who cannot get into wealth-creating activity in market economies, not because these modes of production are unknown, but because they are not functioning in economies that are not developing for all the reasons we know about.

To the extent that
people living in Europe and North America impose tariffs on imports (and allow their governments to continue to do so) they prevent wealth creating income flows to the poorest countries that would not just alleviate poverty but set them on the road to sustainable development.

Neither Angry Bear nor dale (nor, apparently, Brad Delong) sees that they too are implicated in the continuance of the problem. If I may say so, they take ‘a very narrow view of the world’ and their places in it.

Tyler Cowen on this issue is right: relative poverty is less important than absolute poverty (a condition that Smith drew attention to in his unfavourable comparison between the ‘Indian’ prince and his subjects, and the meanest day labourer in Scotland and ‘the extravagant luxury’ of his prince. From the division of labour, the day labourer benefited from the inequality of his income and his prince’s, while the destitution of the ‘naked’ subject of the ‘Indian’ prince was so mean compared to his prince, as to invite the conclusion that the inequality of the day labourer was preferable (WN I.i.11: p 23-4).

It wasn’t and isn’t inequality that causes people to ‘lose faith’ in the ‘fairness’ of markets; it’s their exclusion from participating in markets (an exclusion in which Angry Bear, dale, and Brad Delong are complicit). When given a choice – even one beset with high risks of loss of life – people outside the unequal USA and Europe make extraordinary efforts to get into these continents to participate at any level of inequality in these continents.

I sometimes think that these uneducated victims of absolute poverty are smarter than some of those educated at the best universities, which hire the best tenured professors in the world.

All three critics of Tyler Cowen, presumably, have read Book I of Wealth of Nations, perhaps even Book IV of Moral Sentiments; if they have they have no excuse for critiquing Cowen on this issue; if they haven’t they should do so quietly and then admire the good sense of the ‘illegal’ immigrants.

Absolute Poverty is the Priority, Not Relative Opulence

Eduardo Penalver, writing in Dot Commonweal, a Blog by the magazine’s editors and contributors (Commonweal: a review of religion, politics and culture), takes a pop at Tyler Cowen, for his column in the New York Times on ‘Inequality’.

Eduardo Penalver quotes from Tyler Cowen’s column:

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated

Penalver comments:

The notion that we should only care about "how well people are doing in absolute terms" appears to be completely untethered from any plausible conception of human flourishing and its relationship to distributive justice. One reason that Catholic teachings on economic justice are so powerfully persuasive is that they are rooted in a realistic conception of human nature that rejects the unstated individualistic premises about human nature underlying Cowen's op-ed.

Cowen is surely correct that "life is not a race against fellow human beings." But neither is it the case that individual lives are hermetically sealed pursuits in which our absolute well being can even be measured in isolation from what happens to others. For starters, as Cornell economist Robert Frank has argued, most people actually care about their relative position in society -- so making someone at the top even better off than they already are by itself makes other people less well off in a real and measurable sense.

The connection between our own well being and the well being of others does not depend just on the fact that we might be envious of the wealthy, but also on the fact that conventions of social participation are sensitive to the well being of others. Adam Smith understood, for example, that what we legitimately consider to be a necessity will depend upon our particular cultural and social context. Drawing on Smith's insight, Amartya Sen has argued that -- even for someone who accepts an objective and universal account of human flourishing -- the resources human beings need to flourish will vary from culture to culture and, within the same culture, from era to era. As societies become wealthier, what each individual needs in order to meaningfully participate in that society will also become more elaborate and expensive.”

Tyler Cowen’s point seems perfectly sensible to me. It is not, of course, the end of the matter, or the last word, but it encompasses the basic lesson of history that the creation of wealth (the annual flow of ‘necessaries, conveniences, and amusements of life’) takes priority over its distribution.

We once ‘enjoyed’ the equality of absolute and relative poverty for all, but at a very low standard of living, which included short life-pans during the 190,000 years of Homo sapiens before the agricultural revolution, 8-10,000 years ago. It is unlikely that people in that condition were reconciled to their egalitarian poverty and that none of them wished to ‘better himself’ (a powerful human motive said Smith, and with us 'from the cradle to the grave’).

Yes, I know that even living standards dropped too over this period from 10,000 years ago at first, to which population pressures on the hunting mode of production contributed, the struggle to recover from the most recent ice age, and also that much of the agricultural systems in the near East, India, China and, eventually, South America a millennium or so ago, were characterized by ‘tyrannies’ of frightful dimensions.

It was only after what Adam Smith called the fourth age of man, the age of commerce appeared, that the march from subsistence agriculture to the opulence of manufacturing markets was initiated about 2-3 millennia ago, but this was interrupted catastrophically from the fall of Rome (5th century) until its very slow and gradual revival in Western Europe (14th century). Interestingly, China, on the verge of the first breakthrough to modernity in the 14th century fumbled the pass by self-inflicted nutty policies of withdrawing from international contact with ‘barbarians’, about the time that Western sea power was reaching towards the Americas.

China did not get ‘moving’ again until in the 20th century. Even then it took another ‘nutty’’ detour, until it began dismantling its state-run communist economy, to ‘open up’ to the world, which its leaders six centuries earlier had closed at precisely the time when China and its technology might have been the leading industrialized nation in the world for several centuries.

Countries can set the world back for centuries by false policies; a threat that is of concern in the current alliance of anti-globalists and the nuttier waves of the climate change catastrophists (many of whom don’t like capitalism or markets, either).

In this context, Tyler Cowen’s points are reasonable. Not for Eduardo Penalver. He writes:

For starters, as Cornell economist Robert Frank has argued, most people actually care about their relative position in society -- so making someone at the top even better off than they already are by itself makes other people less well off in a real and measurable sense.”

The fact is that ‘most people’ see their relative position as more significant than their absolute position (the zero sum view – what the rich gain; the poor lose, a wholly rhetorical device based on envy – not one of the Catholic virtues, nor Adam Smith’s) and this is not an argument that strikes Cowen’s statement at all. Tyler is talking about priorities; inequality is a price of market driven development, against which attempts at inducing equality by restricting markets have been shown to reduce wealth for all; it does not just redistribute it from rich to poor. Wealth is a flow, not a stock; slow down the flow and you eventually rundown the stock, of which archeology presents many examples.

Smith wrote extensively in Moral Sentiments about envy and the adoration of the ‘rich’ (known as ‘celebrity’ obsession today). Most people do not sit pining for the lives of the rich, but they do care deeply about being relatively poor compared to their peers and this operates within the meanest ghetto and the plushest suburbs. It is already at work among kids in the smallest school playground ‘gang’ too; in any car park; in any club; in any student common room - anywhere in fact where people mix, work or socialize, including within the family (especially when older siblings look at what their parent’s rising incomes mean for the life-styles of young siblings compared to what they experienced a few years earlier at the same age. Inequality across class divides is nowhere as painful as inequality with one’s peers.

It is estimated that Mao’s redistribution horrors killed 30 million peasants families from starvation, and it happened without a free press and media to report the facts on the country’s tv screens. A calamity on a tiny fraction of that scale would have been shown widely each nigth and it would have rocked the government if anything similar had happened in the US (the Chinese people didn’t have many tvs anyway). Compare how a few deaths on a bad day in Iraq damage the President’s standing in US polls with the adulation for mass murder by Mao in China not so long ago.

Amartya Sen also points out in ‘Freedom as Development’(Oxford UP) that some minority sections of the poor in the US have shorter life spans than people in Kerala, India; a sobering point worthy of notice by those who are extreme in their complacent acceptance of satisfaction with US progress. But this problem is more likely to be solved by US wealth than it is by impoverishing the ultra rich. You don’t raise anybody’s life spans by reducing everybody else’s; and, anyway, the deprived ghetto youth cares most about the shoes or the swagger of next door’s resident than about the glitter of Holywood ‘stars’.

Development can take centuries, whatever the emotional pain of ‘make poverty history’ campaigners whose target is measured in weeks or months. Poverty, above all others, is the most common experience of the history of the human species. Wealth is relatively recent history – a mere two centuries out of the two thousand centuries or so that we have been around since our predecessor’s speciation from the Hominids – poverty as the norm is the iron rule of human society, but we are now on the verge of general opulence.

We would be advised to deal with relatively minor poverty and longevity problems in the US with great care and circumspection, so that there is sufficient momentum for economic growth around the world to raise the overwhelming, and, dare I say, absolute majority of the 6 billion people on the planet from abject, crippling, destructive and appalling poverty that is their lot, as it was the lot for all our predecessors long before the priests, rabbis, sun gods and assorted mystics pontificated about ‘falls’ from mythical Eden gardens of the past, and ‘certain hopes’ of mythical heavens after death. Abolishing absolute poverty for the up to four or five billion outside the USA, Europe, parts of Asia, etc., takes precedence over the relatively minor incidences of it in the (skewed)'rich' economies.

Humanity’s salvation from absolute poverty is now happening here for approaching a billion out of six billion; that’s several billion to go and counting. That is the absolute, most important target first. Relative opulence is the spur to eliminating absolute poverty.

[Read the article by Eduardo Pemalver at:]

Friday, January 26, 2007

Kettles, Pots and Ironies (and a bit of Scottish history)

ALEX ROBERTS, a Halifax-based freelance writer and educational speaker, writes a lively piece, “A renaissance in the dismal science”, for The Halifax Nova Scotia 26 Jan. A paragraph in it caught my eye:

“In May, the Bank of England announced a redesigned £20 banknote featuring the image of the famous 18th-century Scottish economist Adam Smith. The irony of a notable Scottish-born economist on a Bank of England banknote notwithstanding, the nation-wide circulation of the currency will certainly give economists and economics a higher profile with both numismatists and the British public alike.”

The double irony is that Alex Roberts, residing and working in a province called ‘New Scotland’ (Nova Scotia), doesn’t know that the Bank of England was founded by a Scotsman, William Paterson (born in Dumfries), a merchant. The Bank prospered, but Paterson’s next project, to join in the commercial work for the ‘Darien Company’ (the Scottish Company for Africa and India’) managed to nearly bankrupt Scotland in its failure.

The Bank of England is the central bank of the United Kingdom now and holds a monopoly on issuing currency, with residual exceptions for the remaining Scottish Banks that are permitted, in legislation going back to the Treaty of Union in 1707, to issue their own notes (mainly as marketing gimmicks because for each note they print under their own designs they must deposit a sterling equivalent note from the Bank of England in their reserves).

Adam Smith is a perfectly respectable image to appear on the new £20 notes this year. His reputation goes well beyond Scotland and the British Isles too.
Perhaps the third irony is that Alex Roberts quotes the cliché about economics being the ‘dismal science’, a, 1849 quip by Thomas Carlyle (another Scotsman) in regard to the views expressed by John Stuart Mill (whose father was Scottish), who published ‘Principles of Political Economy in 1848. Mill defended the emancipation of slaves in the West Indies and called them human beings; Carlyle railed against this notion, using perfectly disgusting language, and said economics was the dismal science’ if it considered Negroes (he used choicer language) as human beings, and argued for reintroducing slavery.

His quip had nothing to do with Adam Smith’s, Thomas Malthus’s, or David Ricardo’s styles of discourse, though many commentators, who use the quip for cheap headlines in the press, often associate it with these other economists and appear ignorant of its origins in the racialist ranting of Thomas Carlyle.

When Educators Need Educating

As if on cue, today’s press brings a particularly 'uneducated' summary of something Smith was supposed to have believed:

This doesn't mean that there isn't any value to it, just that this value is hard to quantify and not well served by a commodity model. Adam Smith, bedrock of capitalism, believed that education was best handled by the state (and church) because business would forever be short sighted in its ability to educate, whereas the interests of civil society required citizens who were sophisticated, literate and critical.”
(From Echo online: “Students seeking 'higher' ed should embrace EMU”)


That is not what Smith believed, nor is it how he expressed it. When Smith was writing, in the mid-18th century, the British university system was in a primitive state (the American colonies were even worse – Princeton was founded by a Scotsman). In Scotland there were the rudiments of a school system, based on local parishes, to which boys went if their parents could afford it, paid for partly by local taxes, subscriptions and nominal contributions from parents. In England (until 1707 a separate country), education to 14 was patchy, with private tutors and fee paying schools, supported by endowments, which meant mostly populated by middles and upwards sons.

There was no distinctive feature in England such as in Scotland, from which most schools most labourers’ boys could read and write, and the brightest of them, of all classes, could find the finance from scholarships, bursaries and such like, to go to University for their education from 14 onwards. It was meritocratic: birght boys went to university, financed by scholarships if they could not pay and sat in classes with sons of Lords and Knights). The English labouring class was barely literate (a couple of years of school), innumerate and positively uneducated. Nothing like this situation exists in the USA today across the whole country.

Smith discusses public education in Wealth of Nations. Basically, he advised extending the Scottish system across the whole of the United Kingdom, especially in England. That implied a massive increase in expenditure to educate all children at least up to minimal standards of ‘reading, writing and account’, and in view of the labourer’s needs to get gainful employment, he also suggested that Latin and Greek (minimal requirements to get to University), the schools should teach elementary mechanics and geometry (WN V.i.f.55: p 785). He did not expact a state to pay for it.

He considered the arrangements to teach people of ‘rank and fortune’ were tolerable but for the rest it was abysmal. For the others, the majority, the situation was serious enough to warrant, in addition to the bursaries, endowments, gifts and scholarships put up by relatively well-to-do people, the ‘publick’ also should be called upon to contribute. He did not specify how this should be done – there were no education departments in government, so you cannot assume in the 21st century that Smith meant his suggestion to be government financed, and through government run institutions, as so many modern American commentators often do – the conservative minded to denounce public expenditure and the trade unions and ‘progressives’ to praise public funded education (in the richest country in the world).

He wrote:

For a very small expence the publick can facilitate, can encourage, and can even impose upon the whole body of the people, the necessary means of acquiring those most essential parts of education.’ (WN V.i.f.54: p 785)

To assume that this means a national or state run monopoly of education provisions is a very large assumption indeed. Like sensible educators today, Smith believed in measuring educational outputs, not their inputs. If local parish arrangements (as in Scotland) worked, they should be copied into all parishes in England; if circumstances were appropriate in a larger town, this could be run by the town council imposing a levy; if private individuals wished to fund a local school they should do so; if parents wished to hire private tutors they should do so, and any combination of these funding arrangements could be arranged. The criterion is: does it work?

He most decidedly did not believe teachers at any level, including universities, should be guaranteed their incomes from the college; he did not believe in monopolies of local provision; he did not believe that existing syllabi were appropriate; he did no believe such a scheme could be workable if organised from the top of the state. What he favoured was that every parent, except the very poorest who could not pay as little as one penny, should contribute something; he believed that teachers should depend on part of their salary, if not all of it, on the choices made by students to attend his classes or go elsewhere (skeleton ‘voucher’ system?); he believed that incompetent teachers, who corruptly gain a living despite their abysmal performance should be replaced by competing rival staff and schools, and he believed that variety in experiments should be tried to find what works.

I doubt if much of this would be supported by US teachers’ Unions, or by dogmatic conservatives. I am less concerned with what would be appropriate for education in the UK and US today. However, I am concerned that Adam Smith is presented in a single sentence as having dismissed school investment by business (in his days these were small one- and two-man units, not multi-nationals, or even nationals), and his having a negative view ‘forever’ as to how businesses might respond.

In this and many other subjects for which Smith’s views have been interpreted, we find his stance was much more nuanced than even community members of the East Michigan University appear to appreciate. Is suggest EMU faculty and administrators in Ysiplanti, MI, US, should read Book V of Wealth of Nations from V.i.f.1-61: pp 758-788.

A Book From One of the Good Guys: read and enjoy

The History of Economics is not yet dead as a subject, despite years of neglect, the slow disappearance of chairs dedicated to the sub-subject in many economics departments, and the absence, except among near-retirees and recent past retirees, who came from traditions that found the history of their subject both taught and understood with colleagues because it was considered to be important in any economist's training.

Books published recently suggest that publishers think they can sell a few thousand copies of titles in the area, so there must be a market for such books if there are customers willing to buy them. Among recent publications there was the effort by Duncan K. Foley on ‘Adams Fallacy: a guide to economic theology’ (Harvard Press), of which I have commented several times, and Peter J. O’Rourke’sOn the Wealth of Nations’, Atlantic Monthly Press, which I noted at the time.

O’Rourke’s book intentionally plays for a laugh, and with this amusing author you get what you paid for; Foley’s was a laugh (in good Smithian fashion: unintentionally) and that means you are short-changed. If many students read 0’Rourke’s book they might be inspired to read Smith’s original works for themselves; if students read Foley’s fallacies about Smith they may be disoriented because of its central flaw: Adam Smith is not guilty to the charges made against him by Foley (though neoclassical economists may well be complicit in creating Foley’s false image of Smith).

Today I came across a review of Thomas Sowell’s new book, ‘Of History and Economics’, Yale University Press, on the Sophistipundit Blog, written by Adam Gurri (

Sowell’s name is known to me from his short booklet, ‘Classical Economics Reconsidered’, Princeton University Press, 1974, which I have among my Smith library because of its enduring excellence.

Adam Gurri Reviews: ‘Thomas Sowell On Classical Economics’,
Yale University Press, 2006, and writes (from which I extracted this gem):

Also fascinating is his intellectual account of Karl Marx, who he spends a great deal of time dispelling the ideas that have been associated with him because of "an interpretive literature driven to the desperate expedient of quoting numerous post-Marxian writers and ignoring Marx himself." He believes that Marx had many ideas that were as respectable as his intellectual predecessors, whom he named as David Ricardo and Sismondi among others. He argues that many of the ideas that have become known as "Marxism" were openly rejected by Marx himself.”

Now I know that this is not directly about Adam Smith but it could as easily apply to him. You could re-cast the paragraph to read (apologies to both Sowell and Gurri):

Also fascinating is his intellectual account of [Adam Smith], who he spends a great deal of time dispelling the ideas that have been associated with him because of "an interpretive literature driven to the desperate expedient of quoting numerous post-[Smithian] writers and ignoring [Smith] himself." He believes that [Smith] had many ideas that were as respectable as his intellectual [successors], whom he named as David Ricardo and Sismondi among others. He argues that many of the ideas that have become known as "Smithian" were openly rejected by [Smith] himself.”

That is precisely what happened to Smith’s legacy since he died in 1790. His modern reputation is based almost entirely on ‘an interpretive literature’ and that many of ideas attributed to him (e.g., laissez-faire, ‘invisible hand’ theories; High-Priest of capitalism; apologist for capitalist multi-nationals; ‘night watchman states’; theory of selfishness and greed; indifference to ‘externalities’; adulation of ‘prices’, not ‘values’; absolute free trade; indifference to poverty; colonialism; ‘neo-conservatism’; ‘neo-socialism’; and Homo-economicus), are without foundation in what he actually wrote in Wealth of Nations and Moral Sentiments.

Hence, I have ordered a copy today of Thomas Sowell’s new book, ‘On Classical Economics’, Yale University Press, from Amazon. I wonder how much of what he re-considered in the 1970s has changed or been confirmed thirty years later?

Wednesday, January 24, 2007

A Small Step in Blogging But a Big step for ‘Lost Legacy’

There are many economics Blogs and I often comment on various posts from them. For those interested in surveying beyond a few of the more famous Blogs by economists, two places to start and to visit at your convenience, and scroll down the day’s entries at your discretion, are:

Economics Roundtable, hosted by Professor William R. Parke of the University of North Carolina, Chapel Hill. Contact info: bp-at-rtable-dot-net. You can reach Round Table at:

Roundtable lists a Blog Roll of all economics Bogs that it surveys daily for their output. Besides economics it also has Blogs on Economic Modelling, Law, and politics.

The other is BlogNetBiz, a more recent addition to the BlogSphere, found at:

Its coverage is similar to Rountable and it has a couple of useful features in that it lists the ‘hottest’ topics of the day among the economics Blogs, and the frequency of posts from Blogs on all topics.

We have recently been receiving record numbers of daily visitors and record numbers of pages viewed. And this is most welcome. Blogging can be a lonely experience, especially with few comments from readers, but the visitors’ count makes up for it:

Today’s count is: All visitors Unique Visitors Page views
23 Jan, 2007 899 471 2,351
Total for seven days 4,962 2,566 11,824

The Blogs that mentioned Lost legacy today are:

Adam Smith Institute (London), one of the most popular Blogs for economists in Europe and a very active organisation that presents practical policies with an Adam Smith slant on them. It is influential in Whitehall and has a record of initiating policies that translate into legislation.

In its regular feature, Blog Review, in which we have featured once or twice, today’s (Number 117) reports:

Gavin Kennedy finds that rarity, someone writing about trade correctly. It's the imports we want, not the exports.”

You can visit ASI at:

The other Blog is new to me, from Romania. Its host is Gabriel Mihalache an economist, and his Blog is ‘Economics Investigations’, which states it is ‘An outlook on economics theory and data, by a student of economics in Romania. His Blog review is called ‘News of the World’, and in no 20 he writes:

“Adam Smith’s Lost Legacy, a blog by Gavin Kennedy, dedicated to dispelling the myths associated with Adam Smith’s name, such as unwarranted associations with neo-classical methods and hypotheses.”

You can visit Economic Investigations at:

Keep on Blogging.

The Old 'IS' and 'OUGHT' Problem Again

There is a growing increase of interest in Smith’s ‘Theory of Moral Sentiments’ (1759), at least that is my impression from reading articles, Blogs, and letters from around the World, courtesy of Google. As more people go beyond his more famous ‘Wealth of Nations” to read his moral philosophy writings, there is a increased awareness that he was a far deeper thinker about contemporary (18th century) issues of his day than they realised.

The wider readership also cuts into the fairly common notion among certain modern commentators (with a lineage going back to some German philosophers in the 19th century) that there were two Adam Smiths, as exemplified in their minds by his Moral Sentiments (1759) and Wealth of Nations (1776). Their most common error is to note the publication dates, separated by 17 years, and conclude that Smith must have ‘changed his mind’ between lauding the virtue of benevolence in 1759 and lauding the motive of ‘self-interest’ in 1776. This betrays a sloppy reading of the two books, a shallow knowledge of his life and work, and an ignorance of his lectures on the very same subjects published from students’ notes in 1762-64 in 1895 and 1958 respectively (now available in an economy edition by Liberty Fund in 1978).

This morning I read an article, ‘Caring’, in a Blog (“Adventures in Bowling Green” from Ohio, US) authored by Peter Martin Jaworksi. He writes:

As of late, I've been doing a lot of reading on sentimentalist accounts of ethics. In particular, Adam Smith's Theory of Moral Sentiments has kept me up at nights. Here, I'm beginning to believe, is the beginnings of the right theory of morality. It is just the beginning, or the root, of the right moral theory.

There are many concerns. Not the least of which is this: Smith's account is intended to be primarily descriptive, and not normative. The theory tells us what Smith thought we do do when we make ethical judgments, and what, in fact, we want when we use ethics. It does not tell us what we ought to do.

I'm guessing that, in the not-too-distant future, I will post about the possibility of making Smith's account normative, and will post some significant differences between the account that I am pursuing for my dissertation, and both classical and neo-sentimentalist accounts. I will also describe the significant overlap, and why my dissertation can best be described as a sentimentalist account

There follows interesting thoughts on Smith’s approach in ‘Moral Sentiments’ and students of philosophy may wish to read them at:

Peter Martin Jaworksi’s question interested me because I have not heard it before, though it may be most obvious to a new reader of Smith’s book. I have often noticed people who criticise Smith for this or that view on the philosophical issues that he discusses in both of his books regularly pose their critical statements as if they too accept Jaworski’s concern.

Somebody recently accused Smith of preferring ‘selfishness’ to ‘benevolence’ in his famous paragraph on the role of the ‘butcher, brewer, and baker’ in securing a person’s dinner. I commented that to read into Smith’s statement a preference for selfishness fell on two grounds; first, his point was that self-interests are mediated in the act of bargaining and had nothing to do with selfishness, and second, that when he wrote about how things happened the way they did he was describing the course of events and not offering a normative judgement about them. Much the same occurs when a doctor says that prostate cancer happens more frequently in men over 60 than men under 30, she states a fact, not a preference.

Smith wrote ‘The Theory of Moral Sentiments’ (from his lectures at Glasgow University in Moral Philosophy between 1751 and 1758). It was a theory of ‘what is’ not ‘what ought’. That sets a limit on his expression of preferences or normative judgments, as his friend, David Hume, pointed out.

Should Peter Martin Jaworksi succeed in presenting a normative theory of moral sentiments, he may break new ground (and good luck to him, I say), but his theory will be different from Smith’s discussion of the history of theories of moral sentiments, many of them normative in themselves (after all, many members of a Church contributed views on the subject). Many of these contributors wrote normatively about the virtues, and several philosophers, including Smith, developed their work without adopting normative stances themselves.

Tuesday, January 23, 2007

Another 'Strategy' For The Graveyard of Hope

Another excellent plan that will go nowhere is announced by Atanu Dey, a Reuters Fellow at Stanford University, who, with a colleague, Vinod Khosla, wrote a concept paper to address major structural problems in the Indian economy. By going ‘nowhere’, I do not mean it will not attract some public funding - even a half credible ‘plan’ is always likely to attract some politician’s attention – but will it serve its stated purpose, or will it end ‘nowhere’, that graveyard of hope for grand development projects costing millions at the ‘top’ that never reach the ‘bottom’ rungs of the growth ladder?

Consider the problem, as identified by Atanu Dey in : “A Brief Introduction To RISC — Rural Infrastructure & Services Commons”, posted in “The Indian Economy Blog” (

“India’s economic growth and development is predicated to a large extent upon the development of its 700-million strong rural population. Currently, the majority of India’s population lives in about 600,000 small villages and are engaged primarily in agriculture and related activities. Since a very large labor force in agriculture necessarily implies very low per capita incomes, a substantial portion of India’s current agricultural labour force has to move to non-agriculture sectors for incomes in all sectors to go up. The challenge is to manage the transition of a large segment – perhaps even 80 percent – of the rural population from a village-centric agricultural-based economy to a city-centric non-agricultural economy, and do so in a reasonable period.”

So, this plan is aimed at solving the development problems of 700 million people in the Indian rural population spread in 600,000 small villages, through ‘RISC’ or ‘Rural Infrastructure & Services Commons’, a project that cannot be summarized in a paragraph. You had better read what Atanu Dey says about it for yourself at:

Economic growth is both a cause and consequence of urbanization.”

Yes, but economic growth is primarily caused by markets extending their operations from simple transactions moving towards ever more complex transactions (the division of labour is a primary consequence here). Smith, in Book III of Wealth of Nations, outlines the details of the process as it happened in Britain and much of Western Europe, which remained primarily a rural dominated economy until well into the mass consumer societies of the 20th century. Strategies to develop urbanisation would not have hastened this process in Europe (even if they had been thought about) and it is not clear why they should do so in India.

RISC provides a signal to coordinate the activities of a host of entities: commercial, governmental, NGO’s. It synchronizes investment decisions so as to reduce risk.”

Public managed ‘RISC’ ‘signals’ are unlikely to be more effective than private sponsored market signals where millions of people are slowly inducted by experience (not ‘plans’) to take risks. Given the right incentives, people will take risks; comfortable palliatives to risk (other than justice) are likely to go the way of all palliatives have the impact on the problem of placebos.

RISC is not an attempt at social engineering through centralized planning. Neither is it another model of Internet kiosk or telecenter. It aims to solve a problem by appealing to the profit motives of all participants, be they private sector, NGOs, or the public sector. The good that will surely come out of it can only be attributed to Adam Smith’s invisible hand.”

That says it all! Doing ‘good’ is not a product of the sincerity of its sponsors, unfortunately, and as for attributing the hoped-for outcomes of RISC planning to ‘Adam Smith’s invisible hand’, I shall leave to new visitors to Lost Legacy to read over my many contributions of the subject of the misattribution of Smith’s use of a metaphor in the 18th century and its 20th century elevation into a theory of markets that he never held.

Greed and Markets Do Not Go Together

Critics often cite greed as a motive of markets at work. Some critics of Adam Smith accuse him of preferring ‘selfishness’ and ‘greed’ as a motive, and of decrying ‘benevolence’.

As often, on Lost Legacy, I deny these assertions emphatically, and I assert to the contrary that markets are about the mediation of the self-interests of the transacting parties to the mutual benefit of both, the actual proposition of Adam Smith in Wealth of Nations (Book I, chapter 2) and, incidentally also in his ‘Moral Sentiments’ (Book II, chapter 2). In markets we serve our self-interests by serving the self-interests of others.

In disputes between critics of Smith and his legacy, as published in his books, both critics and myself often quote his famous passage from Wealth of Nations (p 25) about the ‘butcher, the brewer, and the baker’ and the customer looking for items for his dinner, but with different understandings of it. The only way each is likely to succeed in serving their self-interests is by addressing the self-interests of the other through finding an outcome to which they can both agree, summed as the ‘price’.

If we are ‘bound together by the agreeable bonds of love and affection’ that is great for us all; but if not, because we are anonymous strangers, we can still transact peacefully by ‘a mercenary exchange of good offices according to an agreed valuation’ (Moral Sentiments, pp 85-6), summed as 'price'.

Well, we have been treated over the last few days to a test of the ‘markets are about human greed’ propositions versus my ‘no they are not; they are about ensuring harmonious human relationships and civilised societies’.

A 62,000 ton merchant ship, ‘Napoli’, has been beached at Branscombe bay on the Devon coast, south-west England, following severe storms that fractured the ship’s stability and threatened to sink it in deep water in the English Channel. When beached in shallow water, 123 of the ship’s 2,323 containers slid into the water and the wind blew some of them (the others sank) onto the beach at high tide, where they were stranded from Friday onwards.

A few hundred, later many hundreds, of people, seeing the news items vividly on tv, arrived at the beach for a look at the scene, the beached containers on shore and a few hundred yards away the stricken ship, listing to one side, oil leaking from its engine room, and on the verge of breaking up altogether if the severe weather continued. Fortunately, the weather abated a little (though its due to get worse tomorrow).

The beached containers held, variously, 1200cc BMW motorbikes (priced upward of £9,000; or $17,000), small tractors, books, barrels, Nike trainers, bottles of perfume, car steering wheels, bottles and barrels of fine French wine, beauty cream, Bibles, dog food, camcorders, complete engines for vehicles, oil paintings, and scores of boxes of nappies (diapers). Some containers on the ship held hazardous cargo.

Now Branscombe beach was not a market. There were no property rights on that beach recognised by the looters, though property rights clearly existed in the owners of the goods in the containers. The outcome: theft on a large scale from the locked containers, opened by individuals carrying heavy bolt cutters, brought by them to the beach (premeditated), their cars and vans parked along the road (probably locaked too), many with young children left to play in the sand as darkness fell, and the tide rushed in. Fortunately nobody entered the water, and the containers on the beach did not include the ones with hazardous chemicals.

One ‘scavenger’ (read: thief) told the media: ‘As far as I’m concerned, it’s anybody’s. They’re trying to say it still belongs to the shipping company but half of its ruined. It’s only a few bits and bobs and if all they lose is the odd steering wheel, they should be grateful. It’s the spoils of war’.

Please understand, I am not preaching against sin, or of being a ‘Holy Willie’; I’m not even saying the thieves should be ashamed of themselves. People are what people do (‘let him without sin, cast the first stone’, etc.). Take away property rights, any minimal probability of being caught and sentenced in the justice system, and what Smith called graduating from the ‘school of self-command’, and the outcome for harmonious society is predictably bleak.

Markets are one human solution to the problems of distribution of things that people want beyond what they can do for themselves. There are other human solutions with as long, if not longer, pedigrees than markets. Plunder is the main alternative to exchange by trade, and for many millennia plunder and violence were the prevalent choice of our ancestors. Unknown individuals, aeons ago, stumbled on primitive forms of peaceful exchange, probably in isolated acts amidst reversions to plunder. Humans are not perfectible – and certainly not all of them perfectable at the same time.

But, as other pairs of individuals found peaceful exchange useful on occasion, along with isolated incidents of what anthropologists called ‘Gift’ behaviour, reciprocal beneficial gestures, and non-violent persuasion, the propensity to ‘truck, barter, and exchange’, slowly and gradually became prevalent, until in market economies it became dominant. It defines market transactions.

At Branscombe beach, for several thousand people over two days (and nights) there was a reversion to the alternative of markets. That is the real lesson from watching the greed-inspired ‘scavenging’ of thievery on a grand-scale. Sure, you can quip about Proudon’s cry of ‘property is theft’, which as a juvenile intellectual idea and a useful topic for contemplation at student parties, but if the vast majority of people around you came to believe that they had a licence to ‘liberate’ your property for themselves (and that includes the clothes you are wearing, the trinkets you carry, and even your body parts and use of them) you might reflect that whatever the weaknesses of markets as a human device for distributing items for voluntary exchange, property rights are all that separates us from the far worse consequences of living in societies without property rights.

You can test that proposition by migrating to countries where property rights are tenuous. All such countries, without exception, are among the poorer and poorest countries in the United Nations. It may also be sobering to consider that there is a connection between the absence of property rights and the abject poverty of the majority of their citizens, outside the upper elite, and it is but a short step even in a civilised market economy like the UK, that people in it – you and your neighbours – are not immune from behaving in a disgusting, greedy and selfish manner, given the opportunity, when tempted to go outside the ‘propensity to truck, barter, and trade’ and the ‘mercenary exchange of good offices’.

A safer test of the above proposition is to cast your eyes over the scenes at Branscombe beach these last three days. Greed is the absence of markets, not their driving motivation.

Monday, January 22, 2007

Why Can’t We Have More Economists Writing Like Prof Lingle?

The camouflaged Mercantile policies of combining mass exportation with high tariffs and other obstructions to imports is the theme song of politicians of developing countries (even of ‘non-developing’ poverty stricken economies, as Douglas North calls them). Tariffs against imports from developed economies are matched with tariffs against neighbouring poor countries.

Christopher Lingle writes a piece, “Revisiting East Asia’s Turmoil”, in The Korea Times (22 January) that correctly places the onus on these countries to learn from their own recent experience, and from Adam Smith on international trade:

Export-led economic growth was a flawed model then, it is a model now, and it has not improved since Adam Smith, the famous economic theorist, drove a stake into the heart of mercantilism in 1776.

While economic growth can come from an export-led strategy, it cannot be sustainable unless it is supported by domestic improvements. The unsustainable nature of export-led growth is worsened if exports are prompted by excessive global liquidity arising out of the permissive monetary expansions of central banker

Despite a widespread illusion that the advantages from trade come from exporting, Adam Smith pointed out that the advantages of trade come from allowing producers and consumers to buy from least-cost providers. This leads to enhanced efficiency and increased real purchasing power as the bases of sustainable economic growth.

Instead of policy makers spending so much time managing exchange rates and their reserves, they should look for ways to encourage domestic entrepreneurs. They should allow their currencies to strengthen within an open economy so that increased imports will bring more robust economic growth and lead to less poverty.”

Please let us have more like this! It’s a pleasure to read both good contemporary economics and the correct use of Adam Smith as a reference point.
And no mention of the mythical you-know-what!

[Christopher Lingle is a senior fellow at the Center for Civil Society in New Delhi and a visiting professor of economics at Universidad Francisco Marroquin in Guatemala. You can read his article at:]

Increasing Returns, Yes; 'Hidden Hands', No

A philosopher manages to combine an observation about ‘increasing returns’ with the usual false attribution by neoclassical economics of ‘an invisible hand’ to Smith, thus spoiling an interesting point of relevance to current economic debates, originating with Smith and Romer, on increasing returns.

Jerry Schmitt writes (American Thinker, 22 January, Berkeley, AZ, USA):

Biting the hand”

“Gordon Moore noted in 1965 that the density of transistors on integrated circuits doubles every two years reducing their cost by half. Mr. Moore is among those surprised at the accuracy over forty years of his eponymous "Law" - the results of which played a major role in the West's Cold War victory. But what kind of Law is it? A Law of Physics? A Force of Nature? No, it is an economic law - a visible manifestation of Adam Smith's "Hidden Hand". Moore's Law results every year like clockwork from intense, uncoordinated, costly, risky, ruthless yet lawful international commercial competition among companies such as Intel, Texas Instruments, AMD, IBM, Motorola, Sony, Hitachi, Matsushita, etc, etc. and a myriad of specialist supplier companies, including behemoths such as Applied Materials.”

Moore’s ‘law’ (more like an observation) is about costs, not necessarily computing power, and has he has noted himself, the finite limits would be reached at the atomic level. To call it ‘a visible manifestation of Adam Smith's "Hidden Hand", is going too far.

There is no ‘hidden hand’, nor an ‘invisible hand’, at work. Competition in markets (and wider, in society and throughout human history) is a well-known process, part of human social evolution, akin to but not identical with, Darwinian natural selection among biological phenomena. Mystifying a well-studied phenomenon with ‘invisible hands’, beyond the metaphorical level, is unnecessary and also risky in science. Philosophy has rejected explanations of natural phenomena that involve pagan belief in invisible gods; economists in the 20th century let these beliefs back into theories of markets. They serve no useful purpose.

[Read Jerry Schmitt's letter in full at:]

Sunday, January 21, 2007

Adam Smith Not responsible for Neoclassical Decreasing Returns

I have commented on David Warsh’s book, Knowledge and the Wealth of Nations’, on ASLL and I return to what a reader has to say about it. I believe the reader, Tom Debevoise ( commits an error, first of attribution of ideas Smith did not have (yes, it’s good old invisible hand again) and then by extension heaps a problem on Smith that he did not, in fact, have in Wealth of nations.

Tom Debevoise writes:

“you should first read and grasp the two fundamental economic themes of Adam Smith’s 1776 book, “The Wealth of Nations” (If you don’t already know them).

Smith’s book addresses both microeconomic principles and practices using the example of a “Pin Factory”. It was an analogy, or model, for an individual enterprise with its division of labor. The model describes falling cost because of increase scale and managing the classic actors of production, and the pursuit of increasing returns. The story describes macroeconomic industry principles and practices using the notion of the “invisible hand of perfect competition”. The hand is a force that leads to new enterprises entering profitable markets and copying existing profitable enterprises. Supposedly this would lead to rising cost because of demands on scarce resources. Because of competition no enterprise in the industry will set and maintain their prices. The result is decreasing returns (profits) to all enterprises in a given industry.”

The first and second sentence may be acceptable (though it says nothing about the context) but from the third sentence is goes awry.

The division of labour within manufacturing: In Smith’s day this meant exactly that: made by hand, not by machines powered by some source, such as the yet to be invented workable steam engines that could turn objects and drive things. This associated manufacturing with increasing returns, to which growing markets added yet more fruitful divisions of labour.

But Smith never wrote anything about the ‘invisible hand of perfect competition’. This is an attribution of neoclassical economics. His use of the metaphor described human motivation having unintended consequences (not always benign – e.g., monopoly or protectionism – and today pollution).

Diminishing returns was related to agriculture, not manufacturing, and owes more to Ricardo and Malthus. At that time the economy was dominated by agriculture (around half of GNP). Manufacturing was stirring but not yet flooding across the economic landscape. Political economists tended to focus of the economics of agriculture from the Physiocrats through to all the classical economists. Smith did not get increasing returns wrong; what he said was right, but he did not address the question of the future changes in the economy with manufacturing, driven by power machinery (electricity) because he took an historical, not a prediction oriented, view of the economy he studied.

Neoclassical economics, post-1870 and the marginalists went down the diminishing returns road, even after the ‘industrial revolution’ (which Smith knew nothing about, nor did he know anything about the phenomenon of capitalism, a word invented in 1854).

Profits still fall in industries without innovation changes or replacement technologies. Neoclassical economics and general equilibrium theory, focused on the conditions of perfect competition, not Smith; it imported into economics diminishing returns as a general rule for all activity, not Smith.

That Romer has challenged the assumption of neoclassical economics of decreasing returns to industry is timely; that Smith set the profession on the wrong road is no true, unless, of course, you attribute to markets the myth that Smith found in them ‘an invisible hand’. You may do this safely, but you cannot establish that Smith had this view. If you think I am wrong, please educate us all from his Texts (not second-hand quotations and ascriptions).

The division of labour and new technologies challenge an individual enterprise’s increasing returns in their current product lines. In short, increasing returns are not infinite in a firm; they may be in an economy as a whole. The firm may adapt and continue with rising profits; it may, as so many have, go from profits to losses and extinction as other firms overtake them. That is what Schumpeter meant by the ‘perennial gale of creative destruction’ – the endogenous intervention, if you like, of new knowledge.

[Read :]

Thursday, January 18, 2007

A Difference of Opinion

In “P-I” (Seattle) I find an enthusiastic review (as you expect) for O’Rourke’s new book on Adam Smith. But P-I columnist, Bill Virgin, makes remarks on Smith’s Wealth of Nations with which I disagree, not that my reaction is crucial in deciding on the quality either of Bill’s column or O’Rourke’s new book.

Bill says:

Mark Twain once famously defined a classic as a book that everyone praises but no one reads. Few classics are more praised -- or at least debated -- and less read than Adam Smith's "The Wealth of Nations," the founding treatise of modern capitalism.

There's good reason for that. Not only is Smith's book long, but Smith, being a man of the late 18th century, writes in the style of the late 18th century, with the resulting sentence structure and vocabulary making for a hard slog

For reasons explained here many times, I do not regard Wealth of Nations as a ‘founding treatise of modern capitalism’. Smith’s book is something well short of being a ‘founding treatise of modern capitalism’. If Smith had not written his book, the economy of Britain would still have evolved into ‘capitalism’ (a word and phenomenon unknown until the mid-19th century) and we can assert with confidence that Wealth of Nations had little impact, if any, on the entrepreneurial activities of the hundred, then thousands, then hundreds of thousands, of people who made up the capitalist economy in the late 19th and 20th centuries that transformed the world.

That Smith is acknowledged as the ‘father of capitalism’ (and other accolades) is not the result of his book (as Bill Virgin and Mark Twain apparently agree: it was, and is, largely unread). Wealth of Nations is ‘famous’ for being famous. The commercial society that Smith studied and wrote about evolved into capitalism, unanticipated almost totally, by those interested in analyzing it. Legislators intervened without understanding Smith’s analysis, other than the odd, often misunderstood, quotation from his book, the bulk of which was skipped, even by most economists.

The debate moved on without Smith, unfortunately, and diverted into deeper analysis, largely mathematical. Smith’s historical method – with strong hints of social evolutionary processes - was ignored; it is only now coming back into its own having been dormant for most of the decades since he died in 1790.

Agreed, Smith was not a modern tabloid writer (no sentence longer than five words; no paragraph longer than three sentences) but neither is he a ‘hard slog’. His style is highly literate. I have read many modern books and articles that are really a hard slog, apart from those that are just plain wrong. But that is only my opinion. I recommend that you read his books (Moral Sentiments is an absolute gem of written fluency) before accepting Bill’s assertions. He wasn’t writing a textbook in Wealth of Nations; it is a report of his detailed inquiry into what caused commerial economies emerging from agricultural dominance and what had characterised their growth paths in given historical and contemporary conditions. Its so-called ‘diversions’ in the main are his assembled evidence for his careful and clear statements.

[Read Bill Virgin’s article at:]

Wednesday, January 17, 2007

A Critique of Foley on Smith that Also Does Not Understand Smith

With following parting blast, Stephen J. Grabill, Ph.D., Research Scholar in Theology and Executive Editor, Journal of Markets & Morality, has a justified go at Duncan Foley for his book, ‘Adam’ Fallacy’ (critiqued here on several occasion):

If Adam’s fallacy is Smith’s rationalization for laissez-faire capitalism as Foley argues, what shall we call Foley’s “imaginative reconstruction” of economic history? How about “Foley’s Myth”?”

I too took the view that Duncan Foley’s book should be treated as “Foley’s Fallacy” and I shall look at Stephen Grabill’s article with a similar critical eye. He writes:

In Wealth of Nations, Smith wrote what has become one of his most quoted passages and the inspiration for Foley’s critique:
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.

This passage is offensive to many because it seems to prefer selfishness to benevolence.”

Please Stephen, read the passage you quote again and explain how Smith ‘seems to prefer selfishness to benevolence’? It doesn’t say anything about his preferences. In fact, he had a high regard for benevolence, he just didn’t observe it as being sufficient for every person on the planet being able to ensure he or she would get their dinner by relying on other people’s benevolence; there isn’t enough food for dinners for everybody to expect everybody else (how?) or other people to benevolently give them their dinners, and certainly not if all others were expecting the same benevolence from every other.

That is not a statement of moral preference; Smith observed and reported the situation in the world as it was, and not much has changed since (otherwise nobody would be hungry and everybody would have the living standards of the average American).

But more fundamentally, Smith does not advise selfishness in that passage, and you can see why if you read it carefully. If he had advised everybody to be selfish (in the style of Bernard Mandeville, Fable of the Bees, 1724, who did justify selfishness as being a good thing, much as Geko did in ‘Wall Street’), nobody would get their dinner, because each party to the transaction, you and the ‘butcher, brewer, and baker’, would selfishly insist on the other party foregoing their selfishness so that you could satisfy yours!

So, if two people acting selfishly doesn’t get you your dinner, and relying on other people’s benevolence won’t either, what does bring the transaction to a satisfactory conclusion? Smith provides the answer: you must not pay regard to your own selfish interest and neither must the butcher, etc., but each must address the self-interest of the other party.

They must in fact ‘never talk to them of our own necessities but of their advantages’ in concluding the transaction. They must, in short, persuade them that it is in their interest that they conclude the transaction, as they must do so in practice. Bargaining is not an act of compulsion or some kind of coercion. It is a voluntary transaction that benefits both parties by each serving their self-interest by serving the self-interest of the others. This is far from selfishness, which relies on deception, stubborn disregard for the self-interest of others – ‘pay up or else’ – and degrees of violence that transforms voluntary transaction into various types of plunder.

I suggest that Stephen re-read Wealth of Nations, Moral Sentiments and, for good measure, Smith’s Lectures on Jurisprudence, which were delivered at the same time, in the same classrooms, to the same students between 1751 and 1763. These ideas were not separated in time as the publication dates of Moral Sentiments (1759) and Wealth of Nations (1776) suggest to those who are unaware of how Smith worked (as were the originators of the ‘Das Adam Smith Problem’ in the mid-19th century).

Moreover, Smith did not write about ‘competition on capitalist markets’, nor did he deny ‘real consequences of capitalist development’, for the simple reason ‘capitalism’ was a 19th-century, not a mid-18th-century phenomenon (the word capitalism was first used in 1854, not 1754). Smith wrote about market transactions, how they had evolved from the division of labour since pre-history, and how they fitted in with the conditions for social-harmony that he expounded at length in Moral Sentiments.

Foley does not understand this because he appears to been disillusioned with neoclassical economic analysis (to which I say, ‘Hear, hear’!) but that is to do with his academic education under the influence of the general equilibrium models based on abstract mathematics and not real markets transactions involving real people. These modern models have nothing, or almost nothing, to do with Adam Smith or anything he wrote.

That is why I call his book, Foley’s Fallacies’, and on that we can agree.

[Read the review by Stephen Gragill, which contains several other points I have not dealt with on this occasion, at:]

Tuesday, January 16, 2007

'Rational' Markets Theories May Predict But Do Not Explain Real Markets

Adam Smith highlighted the one motive that people share from ‘cradle to grave’, namely to seek ways to ‘bettering our condition' (TMS I.III.2.1: p 50). That is how people are and they don’t necessarily behave ‘rationally’ in making their choices in how they go about meeting their central motive.

It is a requirement of neoclassical equilibrium theory that rationality be exhibited. Take that away and look for models that can contain all consequential actions of people and we move closer to explaining how markets work.

Craig Newmark in his interesting Blog, “Newmark’s Door” (‘Things one middle-aged economist finds interesting’), takes up the theme posted by Don Bourdreaux, which I commented on the other day:

Nice article by Don Boudreaux explaining why, even if some individuals are sometimes irrational, the market is still rational.
Asked differently, doesn't human weakness and irrationality make the invisible hand of Adam Smith at least a bit palsied? And, if so, doesn't a palsied hand need some conscious guidance from caring attendants?


The case for the market doesn't require that each of us behave in textbook rational fashion. One of the great benefits of free markets is that they both reduce the frequency of irrational behavior and temper the ill consequences that would otherwise occur when people do behave irrationally.

Neoclassical markets are ‘rational’ in that they conform to their assumptions, but do they map how real markets operate? If not, then the question posed is non-operational; it is an abstraction. Economics should move on and seek to explain how real markets operate with real persons transacting in them, rather than try to squeeze people into strictures from the requirements of mathematics, more concerned with precisely predicting than with explaining.

Smith and Others Knew Their Water from their Diamonds

It’s always pleasurable to read Adam Smith’s contributions to the history of economics that are presented correctly. Last year I had occasion to correct statements to the effect that Smith ‘discovered’ or asserted ‘first’ the diamond water paradox between the use and exchange values of an economic good. He stated the paradox, of course, in Wealth of Nations but so had several earlier authors before him.

So ‘Hedgefund guy’ in the Mahalonobis Blog is spot on in his comment on a statement in the Wall Street Journal (WSJ), 16 January:

Diamond-water paradox applied to synthetic diamonds. Doh!”

“From last weekend's WSJ:

These lab-made diamonds have begun trickling into retailers at prices below those for natural diamonds of similar size and sparkle.
De Beers extols the permanence of natural diamonds and attempts to make them seem special. They're "billions of years in the making," it says on its diamond information Web site, "Adding to the mystery and aura of what make diamonds so sought-after" is the fact that "approximately 250 tons of ore must be mined and processed in order to produce a single, one-carat, polished, gem-quality diamond."

I think these diamond producers don't realize that higher cost doesn't imply higher value. In fact, the paradox of value is also known as the diamond-water paradox, because it notes that although water is on the whole more useful than diamonds, diamonds command a higher price in the market. Adam Smith famously propounded on the paradox in The Wealth of Nations, though heavyweights such as Copernicus, John Locke, John Law and others had previously tried to explain the disparity in value between water and diamonds. Marginalism brought about the birth of neoclassical economics and argues that it is not the cost or use-value of a good that determines its price but its marginal utility. Thus the marginal value of a synthetic diamond, like that of a cultured pearl, is unaffected by its provenance. I doubt anyone feels sorry for diamond makers grasping at straws.”

I shall be happier when I see more of this sort of thoughtful comment. Smith’s contribution to economics is strong enough not to require false ascriptions of views that were also presented by others.

Now, I know that scholars know this, but graduate economists, and others who attended Economics 101 (or what I see is called Ec10 at Harvard), often shorten the list of other contributors simply to Smith, stating or implying that the paradox was original to him. Clearly, it wasn’t.

To the list of others offered by Hedge fund guy we could add: Plato, Samuel von Pufendorf, Grotius, Harris, Cantillon, and Mandeville, and his own tutor, Francis Hutcheson. Clearly, not a lot of commentators on Smith know that. But as clearly, Hedgefund guy does, and so do you now, if you didn’t before.

Monday, January 15, 2007

Taking care to Distinguish Between Mises and Murray Rothbard

A correspondent writes (in a post down the page on 'Left' and 'Right' Libertarians:

"As far as I can see there is considerable difference between Mises and some of his followers, particularly Rothbard, about Smith. A brief search of Mises' texts suggests that he regarded Smith as a prophet of 'free market liberalism' and that Mises thought he was more important than the French Physiocrats. I also used Google Scholar to sample commentaries and commentators on the Austrian School generally agree that Hayek was very enthusiastic about Smith, Mises a bit less so, and Rothbard accused Smith of paving the way to Marxism. This is not my area of specialisation, but may I suggest you might have confused Mises with Rothbard? In general I'm very happy with ASLL, which is a model of well informed and careful blogging, correcting common misconceptions about Smith." (Barry)

I have tried to post this reply but the New Blogger won't let me in using either my Google name and password, nor my Old Blogger (though if I use this one, it sends me back to the New Blogger and still won't let me in):

"Thanks Barry. You are correct; there is a difference within the Mises trend, and I should be sensitive to that giving the approach of ASLL to Adam Smith's epigones."

Saturday, January 13, 2007

Congratulations Brad Delong and V. S. Ramachandran

For those who don’t yet read Brad Delong’s Blog each day, or at all (including because they haven’t heard of it), may I suggest that they visit today’s postings. Yes, I know that Brad Delong sometimes overdoes his disregard for President Bush, White House Staffers and Washington Press Correspondents, but that is his privilege; he votes in the USA and I don’t, so I shall shut up about what I do not understand, and read his Blog selectively, as you can.

And what a selection we have today on a purely scientific matter of relevance to Adam Smith’s legacy! The post I refer to is called: “Neurological microfoundations for Adam Smith's Theory of Moral Sentiments” and refers to an article, ‘The Neurology of Self-Awareness’ by V. S. Ramachandran, who is Director of the Center for Brain and Cognition and professor with the Psychology Department and the Neurosciences Program at the University of California, San Diego, and Adjunct Professor of Biology at the Salk Institute.

Brad Delong reproduces a report of Professor Ramachandran’s article under the heading linking it to Adam Smith’s Theory of Moral Sentiments without comment, but for anybody familiar with Smith’s theory of the impartial spectator as the moderator of human behaviour, it has high relevance. How much relevance it will take me some additional reading to assess, but I am excited sufficiently this morning to alert a wider circle of possible readers to the possibilities. I was working late last night on summarising the importance of Adam Smith’s thinking for the moral philosophy, within which he located his political economy, and reading Brad Delong’s Blog this morning, which I scan every day it’s published, I was struck by its possibilities.

If Professor Ramachandran is correct, the neurology of self-awareness relates closely to the recognition within the brain of the intentions of observed others, and this faculty played an important part in the evolution of human consciousness, unique in its highly developed form to the human primate, but also found in primitive forms in earlier (in evolutionary terms) primates. Smith argued in Moral Sentiments that humans are not born with an innate moral sense (as claimed by Hutcheson and others), but develop their moral sense from the mores and norms prevalent among others in their social contexts. He gives the example of a person living all his life outside the company of other humans and suggests he would not have any sense of beauty or appropriate behaviour because he would not have the ‘mirror’ of society by which he could judge his own self behaviour.

But suppose each of us was born with a brain-based capacity to make crude judgements about self, mediated by what others around us found acceptable, or otherwise, and in our contact with others (parents, other children; later other adults, and so on) we practised anticipating and reacting to what we had observed, or we thought about how others would see whatever we were about to do (the impartial spectator, ‘the ‘man within the breast’, etc.,), and that we sought praise (preferably ‘praise worthiness’) by behaving acceptably to others, then there would be scope for developing our moral sentiments.

At this point, I suggest you visit Brad’s Blog at
and after that visit another article by Professor Ramachandran at

If you have not read Smith’s Moral Sentiments yet, you can read the early chapters on Sympathy and read it for yourself. You may also, or alternatively (though you will miss out on Smith’s wonderful literary style), read my short summary of Smith’s moral philosophy, including the impartial spectator in 'Adam Smith’s Lost Legacy', Palgrave Macmillan, 2005, pp 39-69.

If anybody has comments on Professor Ramachandran’s articles and their implications for Smith’s ‘impartial spectator’ I would be delighted to hear from you.
Meanwhile, congratulations to Brad Delong for his public service in making Professor Ramachandran’s interesting work available to economists.

Friday, January 12, 2007

Unintended Consequences of Misattributions to Adam Smith

As if on cue, following my comments on Don Boudreaux’s unintended promotion of pagan superstition, I find in the Orlando Sentinel, 12 January, an excellent example of the scourge of the mystification of markets, wrapped with the usual nonsense about Smith’s alleged ‘invisible hand’, by John L. Evans Jr. (a former U.S. Senate staffer, and a vice president for an investment-management firm):

As a conservative, I hope he culls and sculpts that mysterious and awesome force that philosopher and economist Adam Smith called the "invisible hand" -- otherwise known as the magical ether of market force.”

Now, not for a moment do I compare Don Boudreaux’s mastery of economic theory with John Evans Jr (that would be, and is, a ‘no contest’) and neither do I intend to repeat my comments on Smith’s use of the metaphor of ‘an invisible hand’ (it was not original to Smith so hardly qualifies as being ‘his’; Shakespeare used it in Macbeth, 3.2 in 1605, Defoe used it twice in his books, 1722-1725, and numerous literary figures used it from Roman times too).

My point is I am not picking on Don (no disrespect!), so much as tweaking his attention to what I consider a problem of attribution, which has, typically, unintended consequences somewhat short of Hayek’s ‘spontaneous order’.

Apologies for Differing with Don Boudreaux

Donald J. Boudreaux writes an active, lively and accurate economics Blog, Café Hayek, and also writes syndicated articles which I get from the Pittsburgh Tribune Review. I have often commented here on the good sense that Don writes on economics and issues of the day, most particular on free trade, (his most recent against Lou Dobbs, a protectionist).

Therefore, it is with some mild reservations that I up against Don on the subject of Adam Smith and ‘his’ invisible hand. Not that Don is of the same ilk as the usual culprits on this metaphor. Far from it. His position is eminently clear and well founded. I just do not agree with his nuanced ascription of ‘an invisible hand’ as an element of how Adam Smith said markets work.

Why is this important? Why not just take on the mindless neoclassical misuse of Smith’s quite clear metaphor and leave allies on free trade alone, especially is they are almost ‘right’? Well, one thing for sure, consistency is important. For another thing, nothing I wrote about Don Boudreaux would have the slightest effect on his immense and justified reputation.

Here are the paragraphs in his PTR article:

Asked differently, doesn't human weakness and irrationality make the invisible hand of Adam Smith at least a bit palsied? And, if so, doesn't a palsied hand need some conscious guidance from caring attendants?
The case for the market doesn't require that each of us behave in textbook rational fashion. One of the great benefits of free markets is that they both reduce the frequency of irrational behavior and temper the ill consequences that would otherwise occur when people do behave irrationally


A little poetic licence is allowed (‘cutting some slack’, as Americans say, I believe). But this last paragraph is problematic:

‘Adam Smith understood that the system is the solution when he wrote that beneficial market outcomes are the result of an "invisible hand." '

It is the extension of the use of the metaphor of ‘an invisible hand’ from what Smith was talking about in both Moral Sentiments and Wealth of Nations that creates an inaccurate impression of his meaning, and perhaps, it is also causes others to make a metaphor into a ‘theory’ of markets, and, in some cases (Jerry Evensky is an example) to associate Smith with theology.

Smith did not use this metaphor in relation to markets. He never wrote that ‘beneficial market outcomes are the result of ‘an invisible hand’. His subjects in relation to ‘an invisible hand’ in Moral Sentiments were about the comparison between the subsistence incomes of landless tenants under late feudalism and their possible incomes if the land was divided equally among all people. No invisible hand was required to meet the condition that the poor were no worse off as landless tenants compared to either the conditions prior to landownership by a few rich proprietors or to a hypothetical equal division of land. In both cases, the situation under rich proprietors from higher productivity would be at least as good, if not better.

Moreover, to be sustainable, landed property in the hands of greedy landlords, had to at least meet previous or alternative arrangements if it was to be sustainable as a social arrangement. As population remained steady or grew (excepting periods such as the Black Death), Smith assertion was obvious. His reference to ‘an invisible hand’ referred to the motives of the players not having any effect on a quantitative outcome that was inevitable if population was to grow.

In Wealth of Nations, the ‘invisible hand’ metaphor states simply that the whole is the sum of its parts, and that if the parts are greater than they would be otherwise, the whole is greater too. Merchants who were risk averse, and in conditions of piracy, fraud and uncertain sea states they had good reasons to be so, preferred to invest locally where they could keep an eye on things, knew the law and the trustworthiness of the people they dealt with. By doing so, local net investment was higher than it would be if they dispersed their capitals elsewhere.

Neither uses of the metaphor had anything to do with markets. If economists wish to extend the metaphor to cover market conditions (I do not see what mystifying it with invisible hands, palsied or otherwise, adds to our understanding of market behaviours) then that is their privilege if on their own account and under their own names. But to pass this notion of as Adam Smith’s is unacceptable. It leads to people concluding, as per HEA meetings last week in Chicago, that Adam Smith was a theologian!

Hayek does not need Smith’s support for the wholly reasonable idea of ‘spontaneous order’. Invisible gods from primitive pagan religion have no place in economics.

Thursday, January 11, 2007

Aimless Discontent is Not an Argument

People are never satisfied and some of their dissatisfaction spills over into dissent about the way things are working out, which is fine in a democratic and secular country like the USA (risky in dictatorships and faith run countries of which there are plenty of example around the world). I came across a posting today from a very angry man and while I accept he has a right to an opinion and to express it as forcefully as he can, I am not pleased that he drags into his argument the person and thoughts of Adam Smith and does it while displaying an alarming ignorance of Smith’s ideas and recommendations.

In a e-newslatter called ‘AC’ (associated content) (‘the people’s media company’), Timothy Sexton (by his name someone descended from British stock, whose predecessors probably migrated to North America, seeking a better life). He writes:

“Adam Smith Lied About the American Dream
It Was Just Another Misleading Marketing Campaign
Is the American dream that Adam Smith wrote of dead or alive? For most of America's history, the myth has persisted throughout the world that all you needed to make it in America was hard work, some pluck and just the tiniest bit of good timing.

Adam Smith wrote about the American Colonies and the ‘recent disturbances’ associated with the rebellion of the American colonists (towards whom he was broadly sympathetic, at least as far as he could be bearing in mind the British government was unforgiving of anti-King public dissent). Smith did not have an ‘American dream’. He did consider, and wrote so in Wealth of Nations that it would be the richer country compared to Britain by the 1880s.

Adam Smith's vision of the perfection of the capitalist system used the analogy of the butcher who was provided a clearly necessary service from which the benefits of the system spread out in all directions: the consumer is left with a full stomach and the butcher has money in his pocket to visit the baker and the whole process starts up all over again. But it is quite obvious that today's market is not driven by the same butcher analogy. Where the consumer may have gotten a full stomach as a result of the butcher's self-interest, what does the buyer of wheel spinners get out of the self-interest of those who sell them? Status? Status doesn't keep your stomach full.”


Smith did not write about the ‘capitalist system’; the word was no invented until 1854 (Smith died in 1790), nor was he aware of ‘capitalism’ as an economic system (a phenomenon of the 19th century).

His exposition of the negotiated transaction of the ‘butcher, the brewer, and the baker’ was related to the bargaining process in simple household markets. His exposition had nothing particular to do with ‘capitalism’ (see above).

Self-interest is not a ‘polite term for greed’. Smith specifically, and explicitly, denounced greed, which was a cynical philosophy associated with the writings of Bernard Mandeville (1724).

Greed did not, and could not, ‘create an invisible hand’ and he certainly did not have a view that the metaphor of an invisible hand ‘would eventually benefit everyone’ (see numerous earlier posts on this subject). He did assert that opulence would come from growing economies, which also meant changing economies, and that this was the best chance for poor people (of whom he was most certainly conscious of and sympathetic to) to rise from poverty. Since his time, this aspect of his ‘optimism’ has proven to be true, and not just in the United States. Markets in India, China, and Vietnam, to mention a few countries, are lifting tens of millions out of poverty ($1 a day) on a scale unimaginable to the poorest people in the USA.

“While Ronald Reagan's devotion to trickle down economics carried the promise of an invisible hand lifting the poor out of poverty and the middle class up to the next rung of success, the actual result proved far less promising and much closer to George H.W. Bush's characterization of it as "voodoo economics."

Whatever the problems there are with ‘Reagonomics’ and George Bush’s ‘voodo economics’ (of which I have nothing to say, not voting in that country), Smith prognosis about growth as the route to opulence by wealth creation is beyond contradiction. That the author believes people have ‘too many nice things’, etc., is an age old belief, prevalent when Smith was alive – there were laws in force making it illegal of ‘common labourers’ and their wives to dress in ‘fancy clothes’.

It is interesting, and telling, that there is no mass migration of the ‘poor’ in America into neighbouring Mexico to escape their dreadful lack of opulence north of the border. Traffic seems to be the other way, suggesting some qualification might be necessary about just how bad it is in the USA.

Read Sexton's post at: