Monday, December 31, 2007

In Adam Smith's Day Cartels Were Legal

Barrons carries an article by John Steele Gordon (here) “Contrivances to Raise Prices”, with the obligatory quotation from Wealth Of Nations:

Adam Smith understood economics because he understood human nature. In The Wealth of Nations he wrote that, "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

In Smith's day there were no laws against such conspiracies. The favorite contrivance to raise prices was the cartel.”

In Smith's day there were no laws against such conspiracies.” Well, that gives it way. John Steele Gordon has selected the quotation, read the bit about ‘same trade seldom meet together’, notes the bit about ‘contrivance to raise prices’, and immediately concludes that because there are now laws against such ‘conspiracies’, there were no laws against them in Adam Smith’s day.

Well, in pure fact that was the case, but Adam Smith’s point was far more serious than the absence of laws against cartels.

Wealth Of Nations contains his critique of mercantile political economy. A singular feature of the time was the legalization, and statutory protection of cartels! Adam Smith’s complaint about ‘trades’ was precisely about their legal status.

In those days – and for long before since Elizabethan times (16th century) – the incorporated Guilds of each town ran their affairs as instruments of monopolies for each trade. Now ‘trades’ were precisely that – butchers, printers, mechanics, weavers, knitters, haberdasheries, shops of all kinds – they were not businesses on the scale thought of today, or common since the 19th century. They were shops.

These were the men who also ran the towns. They decided who could and could not trade in the town precincts, who could sell there, and – note well – who could work there. The Statute of Apprentices allowed them to recruit apprentices and allowed each trade to limit the number of apprentices employed by a trade (usually just two!).

The Trades also required any tradesman to have served his apprenticeship in the same town and prevented tradesmen trained elsewhere from working there. The common route to ensure post-apprenticeship employment was to marry a daughter of the Master.

The Guilds were not just employers (the Masters); they were also the men who served in them. Their nearest modern equivalent is not the capitalist firm; it is the modern professional Guilds of employed and self-employed people, such as the screen writers, presently on strike.

The trades that Adam Smith spoke of did not need to strike – they controlled the laws that protected their privileges and provide the local magistrates who enforced them. It was the Trades in Glasgow who refused permission for James Watt to work at his trade as an instrument maker in 1763. Fortunately for him, and for the ‘industrial revolution’, Glasgow University offered him the post of the University’s instrument maker (Adam Smith was a member of the Senate that appointed him) and it was there that he was given a model of the Newcomen steam engine to repair and later to improve – and the rest, as they say, is history.

Moreover, cartels today tend to be ‘of the same technology’ and stretch across the whole country, sometimes the world. In Smith’s time the 'conspiracy' was open and legitimate, and involved all the different trades of a town in a co-conspiracy to protect each other’s monopoly. They didn’t need to meet in secret and pretend it was a social gathering. They met openly and shared ‘merriment and diversion’ openly.

Adam Smith’s point was that social meetings and their business meetings were directed to one end: keeping the market supply restricted and their prices high – even to each other! – to ensure higher profits than would be the case if there was open competition.

Friday, December 28, 2007

A Libertarian Theologian on Invisible Hands





Gavin Kennedy

Franz Hinkelammert writes about “Humanism and Violence’ in
US/Anti-war (here):

The original article published was published on the Institute for Theology and Politics website (6 December) is translated from the German at Franz Hinkelammert is a liberation theologian living in Costa Rica and author of several books.

This abstract humanism that is still the soul of the colonialization of the world today also marked the establishment of middle class society and capitalism. A true spirituality of the market arose. Mandeville declared private vices were public virtues. Adam Smith transformed this into the invisible hand of the market: evil was good. Evil, exploitation, is only seemingly evil. The invisible hand of the market changed it into a contribution to the general interest so it became the good. Neoclassical theory changed this into the assertion of an automatic tendency to the equilibrium of the market. Neoclassical theory exists in this form in today’s neoliberalism: evil is good whenever it happens in the scope of the market. Although this has been refuted a thousand times, the economists of this school simply look away and repeat their dogma. Without this dogma, capitalism could not be substantiated. Capitalism immunizes itself again and again. This can be read today in the autobiography of Greenspan: The Age of Turbulence. A real spirituality preserved Greenspan from falling back to concrete humanism.”

The disentangling of the errors in this piece would make an excellent test for first year students in a class on the history of economic thought (if there are any left!).

It has a touch of the ‘kettle and the pot’ calling each other names, about it in the sentence: ‘Although this has been refuted a thousand times’.

Adam Smith did not transform Bernard Mandeville’s ‘Private Vice, Public Benefits’ title into ‘invisible hands’ explanations. Mr Hinkelammert has made the transformation all by himself.

That is so ridiculous it can only be asserted if the modern school of economics misinterpretation of Adam Smith’s 18th century ideas is believed and the believers have never read Wealth Of Nations or Moral Sentiments.

Adam Smith's View On 'Fishy' Subsidies to Business

Brian Doherty (a Reasononline) writes (28December)(here: “The Cost of a Free Lunch”, which interviews David Cay Johnston, New York Times Reporter [WHICH I INADVERTENTLY GOT THE WRONG WAY ROUND IN MY FIRST POST OF THIS REPORT! APOLOGIES]and author of “Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (and Stick you With the Bill)” about “a world of government interference in the market to privilege the privileged”.

What I’m asking in Free Lunch is: Are you better off than you were a generation ago when Reagan was elected? Government is just as big, there are vastly more regulations, and as I show, we have many new rules and regulations that handcuff the invisible hand of the market and instead, in subtle, sometimes hidden, ways, extract money from the pockets of the many and funnel it to the politically connected few. It’s the very thing that Adam Smith said would ruin the benefits of markets. I would think libertarians would like everything in the book, except for the parts about health care [where he calls for nationalized health care, European-style].”

You might think that companies that get subsidies would make bigger profits than normal. But Adam Smith told us that subsidies bring in brash adventurers who often end up making no profit, and the evidence is that Cabela’s at least as it publicly trades, doesn’t appear to be particularly profitable. Cabela’s in fact, in its first three years as a publicly traded company, had $223 million in profit, and subsidy deals worth $293 million. I argue that they are not in the business of selling sporting goods; they are in the business of reeling in subsidies.”

What excellent reporting! It really puts the unholy alliance between businesses seeking subsidies and government contracts with politicians seeking to look good in photo-shoots outside or inside a new plant built with tax breaks (only needed because business taxation is too high).

From the article of the interview (here) the US business subsidy scandal borders on moral corruption. Some of them are not in the business of making a profit from selling their products; they are in the business of getting subsidies to make their products.

In the case of Cabela mentioned above, they are not making fishing rods to catch fish but they “are in the business of reeling in subsidies.”

Reminds me of Adam Smith’s line about the tonnage bounty paid to the white herring fishery and how ‘it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty’ (WN IV.v.a32: p 520)

I recollect somewhere reading about the licence racket in Nigeria some years ago. You needed an expensive government licence to open a factory to make shirts and the main role of middle-men, go-betweens, and chancers, was to work diligently to get hold of a licence, not to make shirts to make a profit, but to sell the licence at a profit to someone who might do the same. Meanwhile shirts were imported.

Whenever there is a proposal to cut business taxes in a specific geographical area, or in a product type (both selected by the government or its agencies) it is clear sign that taxation is penal and by existing it is depressing business everywhere.

First best, is to slash taxation, including business rates; second best is to slash taxation on a partial basis; first worst, is to offer subsidies in competition with nearby regions or countries.

Invisible Hands Now Hit China - Millions of Them!

Gao Anming writes in China Daily (here): “Property joy could be short-lived

Three years ago, one of my friends wanted to buy a second apartment. He spent three months visiting a dozen projects, and narrowed his choices to several. He was urged by the "hospitable" salespeople to hand in a down payment because prices could rise any time. “He was not moved by what he believed were sales tactics. He was wrong, and the prices did shoot up in leaps and bounds. He hesitated again and again until he dropped his plan.”

But more and more people could not afford new houses. They blamed the government and vented their anger on the Internet. For them, the iron fist the authorities have been wielding recently is most welcome. So is it time for them to celebrate?
Emotions do not beat reason. Since the days of Adam Smith, it has become increasingly accepted that supply and demand will determine prices. China has 122 million hectares of arable land, of which 120 million has been set aside strictly for farming. About 550 million people now live in urban areas. It is estimated another 600 million rural residents will enter the cities in 20 years. One does not need to be wise to envision how scarce land will be, and how expensive it will become

The local governments, despite constant rhetoric against inflating property, actually welcome the prices hikes, and have even become the invisible hands behind growing land prices, as revenue from land transfers make up a substantial proportion of their local revenues. That partly explains why prices have continued to climb despite macro-control polices in the last few years.”

I see that “the invisible hands are at work now in China (an import from US academe’s myths about Adam Smith)! This time invisible hands (note the plural – well, it is populous China) are behind ‘growing land prices’. The facts are somewhat different.

That there is a property boom in China, shared with the West, is indeed fully explained by supply and demand, which requires nothing mystical about invisible hands, spirits or disembodied body parts to add to the well-known processes in economics 101.

In Gao Anming’s article he gives a major clue to what is added to demand for property beyond the simple need to live somewhere. His friend “wanted to buy a second apartment” in addition to the one he already owned.

In short, property deeds are a financial instrument, which may benefit from rising prices in future, partly caused by the additional demand for financial instruments and partly by growing populations (of which China is well-known as a prime example: “another 600 million rural residents will enter the cities in 20 years”).

It seems to me a one-way bet in such circumstances, provided the acquisition costs are met from income and not reckless borrowing.

Thursday, December 27, 2007

A Look At Adam Smith from a Different Angle?

John Médaille writes in The Distributist Review (here) (26 December): “Taxes: Advice from Adam Smith

When considering any subject relevant to government and economics, I always like to consult Adam Smith. Now, there are many who would disagree with this. Smith gets attacked from both the right and the left, usually for all the wrong reasons. Worse, he gets “defended” for all the wrong reasons; his “supporters” often attribute to him opinions he never held and against which he used his strongest arguments. For example, Smith was not a mindless supporter of “big business,” but in fact fulminated against it. For more on this theme, see my The Forgotten Agrarian: On Rereading Adam Smith. It may be Smith's fate to be among the most often quoted but least actually read of the modern philosophers.

It is not that I consider Smith infallible, but I usually find him sensible, and even when he is wrong or incomplete, he usually highlights the correct issues. In Book V of the Wealth of Nations, Smith has an extensive discussion of taxation, one that still serves us well today. Smith begins his discussion by laying out four maxims by which any particular tax can be judged.”

My advice is to read this lively piece from someone with a different angle to what regular readers of Adam Smith will be used to.

It is also a useful test of your knowledge of Wealth Of Nations and early 19th century classical economics.

Can you see where John Médaille may be misled by the terms of the ‘ground rent’ debate? What do you think of his criticism of ‘flat tax’ proposals?

Saturday, December 22, 2007

Findlay and O'Rourke on World Trade: 1000-2000

I have received a copy of ‘Power and Plenty: trade, war, and the world economy in the second millennium’ by Ronald Findlay and Kevin O’Rourke from Princeton University Press and I intend to review it as I read it in the New Year.

In snatches I have read of it so far I think it covers on a grand scale a most relevant range of topics to compliment my interest in the political economy of Adam Smith.

In Wealth Of Nations (and in his Lectures on Jurisprudence), Adam Smith too wrote to a similar theme about world trade from the fall of Rome in the 5th century to the 18th century.

It will be interesting the compare how Smith’s ‘conjectures’ about how philosophy, politics, governance, law, languages, morals, and political economy evolved from when none of these existed to when they reached where they were in the second half of the 18th century. And how they stand in the history of world trade to 2000.

I shall keep you posted when my first essay is ready.

Meanwhile, I am within days of completing the files for my book, ‘Adam Smith: the moral philosopher and his political economy’ for Palgrave’s new series, Great Thinkers in Economics. General Editor, A. P. Thirlwall.

I am currently checking references, eliminating repetition and awkward sentence structures, and losing more words (I’ve cut 18,000 so far, with about 5,000 to go – every word lost a real pain).

Still, the 14 chapters read ‘better’ (6,000-8,000 words each), I think…

Thursday, December 20, 2007

Was Adam Smith a 'Proto-Austrian'?

Peter Klein writing (19 December) on Organisation and Markets [here] presents an arresting headline ‘Adam Smith: Proto-Austrian?’ and an interesting take on Smithian political economy and ‘Austrian’ economics. Two paragraphs caught my attention:

Mises and Hayek admired Smith as a social theorist and system builder while rejecting much of his technical apparatus, especially the labor theory of value.’

‘In “Adam Smith’s System of Natural Liberty: Competition, Contestability and Market Process” Bradley characterizes Smith’s system of “perfect liberty” as an ancestor of the Austrian model of the competitive market process, not the neoclassical model of perfect competition.

I am not convinced that Adam Smith had a labour theory of value for other than what he called ‘rude’ society (the first age on mankind, which ‘all the world’ experienced).

Much of what is attributed to a ‘theory of value’ is a debate about measuring value, for which labour was considered as a possible numeraire (Francis Hutcheson suggested a day’s ploughing as a numeraire because the technique had not changed for a thousand years).

When society moved to ‘improved’ modes of subsistence based on property (shepherding, farming and commerce) the unambiguous Natural Right Law to the product of one’s labour no longer applies, because there are now others with a claim on the output. This was Adam Smith’s point of departure from a labour theory of value.

True, it is not very clear on a quick reading of the relevant chapters of Wealth Of Nations (WN I.v and .vi) because Smith kept switching between the two states of ‘rude’ and ‘improved’ society, without always making clear he was doing so.

From memory, I have noted how often leading ‘Austrian’ economists accuse Adam Smith of numerous ‘crimes’ on the labour theory of value (even blaming him – e.g., Murray Rothbard - for keeping the labour theory of value alive so that Karl Marx could inspire his followers to set up of the Gulag!). Given that ever one of Adam Smith’s contemporaries, including John Locke before him, and his successors, Malthus and Ricardo, were far more firmly attached to the labour theory of value, particularly as an embodied value inside the product, I am astonished that they pick on Adam Smith, whose commitment to labour as a measure of value was tenuous to put it at its strongest.

It is somewhat misleading to state: ‘Smith’s system of “perfect liberty” as an ancestor of the Austrian model of the competitive market process’. This is a fairly common association, though it is inaccurate. Some neoclassical economists refer to Natural Law theories as if they are identical with perfect competition. If Austrians are stopping short of that and confining the association to an ‘ancestor’ of a ‘competitive market process’, the problem remain.

Adam Smith was taught ‘Natural Law’ theories by Francis Hutcheson in the Scotch philosophical tradition passed on from Grotius, Pufendorf and Carmichael. This theory was not Adam Smith’s; he taught Natural Law in the Scotch tradition; apparently ‘Bradley’ is either forgetful, or is not acquainted with the authors of the theory.

The theory was about jurisprudence, not competition in commercial society. In fact Natural Law rights applied, in theory, to any type of society and were independent of the form of government.

Smith also recognised when it was necessary to set aside natural rights (in banking and party walls). They were not inviolate. He was not an extremist.

Tuesday, December 18, 2007

Invisible Hand no 357

Biz/ed here:

Term Adam Smith

Definition: Adam Smith is often seen as the founding father of economics. He developed much of the theory about markets that we regard as standard theory now Adam Smith was Scottish and after graduating from Glasgow (at the amazing age of 17!!) he was a fellow at Oxford and then he lectured back in Scotland again - first at Edinburgh and then Glasgow Universities. Surprisingly this was not in economics. Adam Smith's main work was 'The Wealth of Nations' He wrote it in five books and it was published in 1776. In the work he stressed the benefits of division of labour (specialisation) and its need, and outlined the workings of the market mechanism (price system). Perhaps the concept most associated with him is the 'invisible hand'. He argued that markets would guide economic activity and act like an invisible hand allocating resources. Prices would be the main means to do this. Prices would rise when there was a shortage of something and fall when it was plentiful.”

I have no idea who ‘biz/ed’ is, or what its purpose, but they fall at the first fence because they quote incorrect derivative sources to account in a single paragraph for Adam Smith’s contribution.

That Adam Smith is ‘associated’ with the invisible hand is undoubtedly true, if by ‘associated’ we mean in popular discourse.

The next sentence gives the game away:

He argued that markets would guide economic activity and act like an invisible hand allocating resources.”

No he did not! That statement is attributed to him, but you would be hard put to show it to be true.

He did not argue ‘that markets would guide economic activity and act like an invisible hand allocating resources.’ His reference to ‘an invisible hand’ had nothing to do with markets (WN Book IV: p456). It was about risk aversion and the whole is the sum of its parts.

Smith statements about how markets work in is Book I of Wealth Of Nations, where is did state that ‘Prices would be the main means to [allocate resources]. Prices would rise when there was a shortage of something and fall when it was plentiful.’ But he said nothing about ‘an invisible hand’, nor anything ‘like an invisible hand’, allocating resources.

Markets may be wonderful creations of human society, but there is nothing mysterious, miraculous, or ‘beyond human understanding’ in their operation.

Monday, December 17, 2007

The Demand Curve Slopes Downwards -without help from an invisible hand!

Andrew Mickey CommodityOnline (Kerala, India)
Writes: ‘Commodities Supercycle will continue for years’ (here):

One-hundred dollar oils and sky-high commodities prices would eventually prove to be a drag on the world economy and commodity prices would fall due to lowered demand from a world economy that isn’t growing quite as fast. It’s Adam Smith’s invisible hand at work.”

What nonsense! It’s a market at work, not invisible disembodied body parts. What do markets need from invisible hands to bring about ‘lowered demand’ as prices rise fairly quickly?

The demand curve slopes downward; they do that in Economics 101 (I hope).

Adam Smith wrote about in Book I of Wealth Of Nations and didn’t mention anything about invisible hands; he simply related the quantity demanded the price.

In fact, he only used the metaphor of ‘an invisible hand’ once in Wealth Of Nations and not in relation to markets.

Saturday, December 15, 2007

The Invisible Hand no 355

‘Smoothspan’ posts (14 December) on SmoothSpan Blog (‘for executives, entrepreneurs, and other digerati who need to know about Saas and Web.2.0’) here:
“Google’s Knols (the anti-Trolls) Are Opportunity for All, But Especially for Google

The name “Knol”, BTW, apparently is a short form for “Knowledge Unit”, which is what the Googlers think of these articles as. I prefer to think of the people writing as the Knols, since they’re one of the big differences here. In fact, a “Knol” as content creator is sort of the opposite of a “Troll“. Malik goes on to say this move is also a tacit admission by Google that the almighty search algorithm isn’t everything. It takes people to get to the next step. I’ll have more about that to say below, but he’s right.

Stowe loves the idea of bringing the individual to the forefront, principally because he feels that Wikipedia and similar services homogenize content too much and reduce it to a committee-run process of consensus. This can drain the life out of an idea and certainly an article. There certainly have been problems with unseen backroom tampering at Wikipedia, a phenomenon that Stowe politely refers to as the, “tyranny of the bureaucratic infighting around what is and is not true.” There have been some more nefarious doings in that respect, but I’ll let that be lest we digress. Stowe amusingly replaces the backroom bureaucratic process with Adam Smith’s “Invisible Hand’ as a means of determining truth, which he says is aptly Googlesque. I agree. Capitalism will decide based on who gets the most ad revenue and reader votes, with some subtle jiggling as well. There will be Google’s staff at work for the latter to ensure “quality.” Some moderation will be called for to ensure that Trolls do not infiltrate the Knols, but I hope any such editing will be done with the gentlest touch.”

Problem is that the truth is not a matter of opinion, which is all that ‘majority votes’ and ‘advertising hits’ gives you. That tells you how many believe the myth in the content.

A pity. A rival to wikipedia is a good idea. A sort of second opinion.

See archives for previous (354!) posts on the myth of the invisible hand.

Friday, December 14, 2007

Apologies for Very Light Posting This Week.

I am in the final stages of preparing the manuscript of 'Adam Smith: the moral philosopher and his political economy', for Palgrave's Great Thinkers in Economics series after the Editor's (A. P. Thirlwall) general comments and suggestions.

This requires considerable checking of references, tightening some of the arguments, and, critically, reducing the wordage from 128,000 towards 105,000. I hope to have this completed by next week (though 90 exam papers have arrived today from my previous day job!).

However, I thought I should share with regular readers another source of the use of an 'invisble hand' in literature before Adam Smith used it as a metaphor in Moral Sentiments and Wealth Of Nations (see numerous postings on Lost Legacy)

'To which may be added, that the silent and unseen hand of an all-wise Providence which over-rules all the events of human life, and all the resolutions of the human will, conducted him to that station in life, which tho' far from being the highest in external distinction, yet was perhaps of all others the most suited to the singular talents with which he was endowed, and gave him the opportunity of being more eminently and extensively useful than he could have been in any other.' (page XII)

The author was W. Leechman, Professor of Divinity, at Glasgow College [University] in the preface (dated 1754) he wrote for Francis Hutcheson's posthumous book, 'A System of Moral Philosophy', (1755), which contained the substance of his lectures on moral philosophy when Adam Smith was his student (1737-40). Professor Leeechman became acting Principal of the University when Principal Neil Campbell was incapacited by stroke from 1756-61, until Professor Leechman was appointed Principal in 1761.

Adam Smith subscribed to two copies of Hutcheson's 'A System...'.

I have added this reference to my chapter on the 'Invisible Hand: from metaphor to myth'. Copies of the original paper are available electronically (gavin /at]negweb{dot)com)

I trust regular readers (and authors) will understand my current focus on my manuscript.

Tuesday, December 11, 2007

The Boundary of Government Spending is a Political Decision

I commented earlier on ‘a thoughtful piece on the modern issue of the size of government in modern society’ by Jody W. Lipford and Jerry Slice, professors of economics at Presbyterian College in Clinton, S.C., and posted (from the Washington Examiner) in The Independent Institute (December 10, 2007) (here): subtitled “The Role of Government in Modern U.S. Society: What Would Adam Smith Say?

Here are some additional paragraphs for comment:

Many believe it is unrealistic for government in the twenty-first century to adhere to the limited roles envisioned by Smith. We have our doubts about these arguments. However, we raise a different but related question: if Smith is right that national defense, administration of justice, and public goods are essential to a free and prosperous society, might government’s expanded roles one day crowd out its traditional and essential functions to that society’s detriment?

When we examine evidence on this question, the findings are striking. We first categorize national government expenditures according to whether or not Smith would support them. Under the category Smith would support, we include expenditures on national defense, administration of justice, transportation, and education. We consider social expenditures on Social Security, Medicare, health, income security, and labor and social services beyond the bounds that Smith would support. Next, we examine trends in these expenditures.

Here are some of our findings:

• In 1962, expenditures that Smith advocated accounted for 54.4 percent of the U.S. budget. Yet, by 2005, this percentage had fallen to 27.6 percent, with the Congressional Budget Office projecting this percentage to fall to 22.0 percent by 2011.
• The trend for the social expenditure category runs in the opposite direction. In 1962, social expenditures accounted for only 23.4 percent of the U.S. budget, but by 2005, they accounted for 58.1 percent, and they are expected to account for 63.3 percent of the budget by 2011.
• When we examine state and local government expenditures, we find the same trends, though they are less pronounced than their federal counterparts. The trends show no sign of reversal for either level of government

They conclude:

The consequences are clear. Continued higher rates of social spending will require higher taxes, larger deficits, or dramatic cuts in other government programs, such as those deemed essential by Smith. These, in turn, may cause “slow private capital formation, lower economic growth, and in the extreme...a sustained economic contraction,” according to the CBO. These outcomes are the opposite of Smith’s model for economic prosperity.”

Defence and Justice were regarded by Adam Smith as keystone programmes because the survival of society depended upon them. This did not mean that anything under the heading of defence was sacrosanct. He had a fairly robust view on defence and war-fighting; the former was supposed to deter the necessity for the second.

In fact, Adam Smith was extremely critical for the proclivity for war in the mercantile countries of Europe, largely located in the sad exercise of ‘jealousy of trade’, in which mercantile political economy saw trading partners as engaged in zero-sum transactions – any gain they made was at the expense of their partners.

Goods crossing frontiers in trade were seen by mercantile governments as threatening, not peaceful, substitutes for armies crossing frontiers. Britain’s wars with the Dutch and the French, at root, were caused by such thinking. The massive increase in defence spending in the 18th century from 5 per cent of ‘GDP’ at its opening to 15 per cent at its close were one consequence. The defence of the colonies led to four wars with France; the 7-years war at a cost of £175 million (billions at today’s money). All for what? A monopoly of American colonial trade and an untold cost in diverted scarce capital in the UK, massive spending on unproductive labour and thereby a slower growth towards opulence.

What didn’t happened was the funding of the public works and public institutions that Adam Smith advocated until well into the 19th century, which by then Britain had embarked on a second empire that diverted millions of public spending, and in two world wars, much blood a treasure.

The industrial ‘revolution’ and the spread of capitalism did deliver on continuous growth in per capita income, and the spread of and deepening of democracy. It was not a simple case of the increase in the agenda for public spending on education ‘squeezing’ investment; the amounts could grow in growing GDPs for richer economies. The 60-70 per cent of GDP that was not in the government sector in the 20th century is discretionary spending in the private sector. Taxation levels are set by democratic franchise through elected legislatures. Where the boundary is drawn is not a matter of principle; it is politics, that’s why Smith and others called it political economy.

So, the answer to “The Role of Government in Modern U.S. Society: What Would Adam Smith Say?” is not to be found in Wealth Of Nations, published in 1776. He did not write about the future; he wrote about the historical past and up to the 1780s. I suspect he would have lots to say about the familiar propensity for government waste; about many of the additional roles taken on by governments; and he would probably be surprised why governments continue to do work that the economy is not longer too poor to leave the private sector (including, in the USA: why dredging services are supplied by Army Engineers and not the excellent US private sector firms that operate around the world!).

Jody W. Lipford and Jerry Slice consider the boundary has gone too far towards government funding and I am sure that we would draw up similar lists (though we might differ over some items, given I share Adam Smith’s scepticism about some of the roles undertaken in the name of defence; perhaps space too; and externalities like pollution). But, my agenda for government spending would be centred on Scotland in the United Kingdom, where I vote, and not the internal affairs of the US, where I don’t vote.

One piece of Smithian advice I would pass on: “don’t let ‘men of system’, who are ‘wise in their conceit’, come up with absolute plans to dismantle the government agenda without full attention to the personal costs of rapid change, especially in programmes that affect the poorer communities. Allow for a long transition period. Just a suggestion.

Adam Smith Was Not Schizophrenic!

Bert Olivier writes ‘Neo-what?’ in ‘Thought Leader’ Mail & Guardian Online (here)
which is a mix of philosophy, 'poststructuralist' (?) thinking and economics. However, it is woefully misleading on Adam Smith:

Sure, as one commentator pointed out correctly, Smith was first and foremost a “moral philosopher” (a discipline which he taught at Glasgow), but that does not change the fact that his concern with political economy (that is, with the public world of humans’ economic behaviour) increasingly dominated his thoughts, rather than the “private” domain of morals.

The advice, to read Smith’s The Theory of Moral Sentiments (1759), presumably to discover the “real” Adam Smith, may be well-intended, but does not appear to take into account the marked contrast between that work on moral philosophy and the later work on economics, The Wealth of Nations (1776), as far as so-called “self-love” is concerned.

In the former, Smith sides with thinkers like Shaftesbury in attributing sympathy and fellow-feeling to human beings, rather than to regard self-love, as Mandeville did (rather cynically), as fundamental to all other sentiments. But in the latter work, which is not concerned with (private) moral action, but with public economic activity, albeit on the part of individuals, Smith seemed only too aware that people are generally intent on their own economic interests or gain; that is, they usually behave economically on the basis of “self-love”.

To put it differently in poststructuralist terms, what may seem like an outright contradiction in Smith’s work — between his emphasis on sympathy and fellow-feeling as motivation for moral action on the one hand, and self-love as incentive for economic activity on the other — may be regarded not as a contradiction, but as proceeding along the trajectories of different, incompatible logics, both of which have validity in their respective spheres.

Parallel to Newton’s mechanistic interpretation of nature in terms of immutable “laws”, various 18th-century thinkers interpreted different domains in a similar manner as “naturally” governed by “laws” peculiar to those spheres. So, for example, Voltaire understood society as an embodiment of nature and culture in equal measure, and Adam Smith thought of economic processes and activities as being governed “naturally” by an “invisible hand”, and therefore best left alone (laissez-faire) by the state, to run by themselves.

Hence the term “liberal” — this economic theory is predicated on the assumption that the economy should be left “free” in the form of “free trade” or a “free market”, and — correlatively — economic agents should be given the “liberty” to pursue their own economic interests, without any impediments in the guise of monopolies, cartels and the like (which makes a mockery of Opec, a cartel, today, of course, given its supposed functioning in the context of a “free” market). In this way, Smith believed, the nation would benefit collectively from the (rather selfish) pursuit of economic gain by every individual economic agent

The belief that Adam Smith changed his mind between sympathy in Moral Sentiments and self interest in Wealth Of Nations is a misunderstanding of both. He didn’t.

He lectured in Edinburgh (1748-51) and then Glasgow (1751-64) using much the same material over 16 years. He lectured on moral sentiments (his ethics course) and jurisprudence (his history, law and economics course) in parallel and much of the latter appeared verbatim in Wealth Of Nations.

The gap between publication of Moral sentiments and Wealth Of Nations – 17 years – is misleading, if that is interpreted that the latter is completely different from the former. Those who argue that is have not read his 1762-3 Lectures on Jurisprudence (discovered in 1895 and 1958 respectively).

They are also at variance with what he contains in Wealth Of Nations, usually used to show ‘benevolence’ in Moral Sentiments and ‘self interest’ in Wealth Of Nations, when both were part of his lectures at Glasgow and appear in Wealth Of Nations verbatim in Chapters 1 and 2 of Book I (from Lectures in Jurisprudence given in 1762-3).

In Moral Sentiments (TMS II.i.1-10 & II.ii.1-11; pp 78-91) justice takes priority over beneficence, itself derived from sympathy. Smith shows that society cannot survive without justice but it can survive ‘without any mutual love or affection’ (p86). It is a misreading of Adam Smith to assert otherwise, and it would be contrary to the evidence of the real world to suggest that there was a natural, all embracing and enduring harmony necessary for a society’s survival.

Whatever the claims to the contrary, ‘post structuralist’ or whatever, the supposed different Adam Smith in Moral Sentiments and in Wealth Of Nations did not exist. He was not a schizophrenic! He didn’t teach one thing to his class on Mondays and something entirely different on Fridays.

Let me quote from Moral Sentiments:

‘It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.

But though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved. Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.’ (TMS II.ii.3.1-2: pp85-86)

Given interdependence of each on others, many, probably most, of whom we are unlikely ever to know, it is well that we can benefit from their actions without it being necessary for the happy bonds of ‘mutual love and affection’ to exist among us.

We only ever know a few of our relatives; cousins twice removed are usually strangers of whom we may know nothing at all. Our circle of friends is also limited, and while our acquaintances are a larger set of people, they are still dwarfed in numbers by the billions on the planet (even the millions in our respective countries’ or even those who live in the same town).

When Smith was teaching his classes, using materials that appeared in Wealth of Nations 17 years later, he focused on this factor in human life and explained how people could be in complex exchange links many intersections long and could still benefit from countless transactions among millions of strangers with whom feelings of ‘mutual love and affection’ were not realistic nor necessary. The key was the 'mercenary exchange of good offices' (TMS), or market-based exchanges, as elaborated in Wealth Of Nations.

Bert Olivier does not yet understand what Adam Smith was getting at, but he will if he re-reads the texts (not some isolated quotations) and takes in the seamless continuity of Adam Smith’s works.

Did Adam Smith Favour Large Government?

A thoughtful piece on the modern issue of the size of government in modern society is penned by Jody W. Lipford and Jerry Slice, professors of economics at Presbyterian College in Clinton, S.C., and posted (from the Washington Examiner) in The Independent Institute (December 10, 2007) (here):

“The Role of Government in Modern U.S. Society: What Would Adam Smith Say?”

What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government? For Smith, the ideal functions of government were few and well defined. In his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations, written in 1776, Smith outlined three important government functions: national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education). Clearly, government has grown beyond the bounds of these simple duties.”

When quoting from Adam Smith, writing in the 18th century, it is appropriate to consider the context. In Britain at the time, the government raised taxes and borrowed money and spent it on a lot less than what Professors Lipford and Slice describe as his ‘ideal functions of government’.

It was not so much that Adam Smith wanted government expenditures to be restricted to ‘national defense, administration of justice (law and order), and the provision of certain public goods (e.g., transportation infrastructure and basic and applied education)’ but, in important functions in that list, he wanted government expenditures to expand substantially to provide the necessary elements of the listed functions.

If we do not start from that reality, we enter a fictional, 18th century world of comparing an ideal, but unrealized, spending on essential functions with a totally different but real world of 21st century world of modern big government.

Consider, when Smith was writing, the state of roads in Britain was appalling – effectively roads did not exist on a national scale. Travelling any distance was risky – people, including Adam Smith, wrote their wills before embarking on a journey from Edinburgh to London.

Thousands of miles of national roads awaited to be built and public expense. He correctly argued that whether the roads were managed and maintained by public or private commissioners was to be decided on the basis of which of them would be better at undertaking that role. They were also to be funded by tolls paid by users, with the luxury goods of the rich charged more, and similarly, across the other infra-structure developments. (It’s in Book V of Wealth of Nations.)

Adam Smith’s proposals on education of the young were equally ambitious. In Scotland, charitable, church and publicly funded schools had existed for many decades, buildings paid for by local taxation, and teachers by stipends, supplemented by school fees charged according to ability to pay, bequests small endowments. This had raised literacy levels in Scotland, including among the poor, to levels way above that in England, thought the education itself was rudimentary.

His proposals to extend this policy across the whole country – the ‘little parish schools’ – would involve a substantial increase in public expenditure – there were about 60,000 parishes in the UK. Nothing like universal education was provided for until 1879.

Add his proposal for martial training – field exercises, drills and weapon practice –and it would also involve substantial investment and organisation. He also linked such expenditure to the palliative treatment of ‘loathsome diseases’ like leprosy, a worst case issue, which would extend, inevitably, to other less worse cases, but would also add to public expenditure.

In short, Adam Smith’s ‘ideal’ public spending would have increased actual government spending by considerable multiples. He had an extremely low opinion of government supervision of expenditure and of managing projects, which implies a need for reform to secure proper management, and where possible, to separate public funding from the implementation of the projects using either markets or surrogate markets and local competition.

The largest area of savings out of the then current public budgets was that of defence, or in the reality of the 18th century, the war fighting funding involved in British foreign policy, much of it linked to incidents arising from ‘jealousy of trade’ with European potential trading partners.

In Book IV he makes the case for terminating British involvement in the American colonies – not just in the case of the ‘recent disturbances’ but across the board, in that the colonies cost more to defend than their trade was worth (£175 millions for the 7-year war against an annual gross trade worth £20 million).

They also had the distorting effect on UK world trade, slowed the rate of growth, solidified mercantile political economy and were generally detrimental to UK interests. Commercial trade with the colonies without monopoly was preferred by Adam Smith (they could and should defend themselves).

Professors Jody W. Lipford and Jerry Slice continue with the case against welfare expenditures in their article and if I have time later I shall answer their question, ‘What would Adam Smith, the eighteenth-century Scottish moral philosopher, say about the expanded role of our modern government?’ the answer is not clear cut.

I think it was important to clear up the presupposition in their question first.

Monday, December 10, 2007

Adam Smith's Take on Laissez Faire Noticed in Canada

Another mention of Lost Legacy’s take on Adam Smith and laissez faire.

Marc Lee of The Progressive Economics Forum, posts under the heading “Adam Smith did not wear an Adam Smith tie” a link to the Lost legacy post: ‘How Laissez Faire was Adam Smith?’ (here)

I am not familiar with Progressive Economics Forum, nor with the nuance in the word ‘progressive’ in the North America. Hence, I shall tread carefully and say nothing.

That particular post, which is from my new book, Adam Smith: the moral philosopher and his political economy, (in press Palgrave Macmillan, 2008) seems to have struck a chord across some other Blogs that have mentioned it and given a link to Lost Legacy (for which I am always grateful).

Putting more people in contact with Adam Smith’s actual legacy is the purpose of this Blog, as opposed to the purloined one (an example of the ‘bait-and-switch’ scam - using the name ‘Adam Smith’ to tempt you in and then substituting an erroneous version of his views).

The steady growth in traffic through Lost Legacy is encouraging. More readers visit year-on-year, and other economics Blogs are noticing its account of Adam Smith’s actual views.

Our biggest audience (60 per cent) is in North America, followed by the UK and Europe, with regular outposts in Russia, China, India, Japan, Brazil, Australia and Africa.

Thank you to all concerned.

Sunday, December 09, 2007

Interesting Articles on Greg Clark's 'Farewell to Alms'

In case you missed it, Deirdre McCloskey reviews Greg Clark’s Farewell to Alms, ‘Comment on Clark’ here.

It’s well worth reading.

It was mentioned en passant on Marginal Revolution this weekend (here)

See also: ‘Industrial Evolution’, a review of Greg Clark’s book by Benjamin M. Freidman in the New York Times, Sunday Book Review (here)

In August and september I reported on Gregory Clark's Farewll to Alms and on some of the exchanges I contributed to Marginal Revolution (see Archives).

Benjamin Freidman's review will remind you of some of the issues; Deirdre McCloskey's comment will expose some of the softer underbelly of Greg Clark's thesis.

More Attention to Adam Smith and Laissez Faire

Netsmith at the Adam Smith Institute Blog (here) picked up the Lost legacy post on 'Adam Smith and Laissez faire':

Correcting unsound ideas about other economists: no, Adam Smith was not laissez faire.

ASI provided a link to Lost legacy, for which I am grateful. I didn’t realize or anticipate the interest such a subject would generate, but nevertheless pleased. (Perhaps it’s a slow blog-news weekend?)

Who First Coined the Phrase Laissez faire?

Mark Thoma of the well received economist’s Blog, Economist’s View (here) and he posts ‘How Laissez Faire was Adam Smith?’ from yesterday’s Lost legacy, saying:

‘Gavin Kennedy of Adam Smith's Lost Legacy says not as much as you may have been led to believe’, and then adds:

This is important, "Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles," and failure to recognize this leads to many misinterpretations of what Smith wrote. As for the term "laissez faire," my recollection is that "laissez faire, laissez passer" originates with the Physiocrat Vincent de Gournay.’

Always nice to note we are read by serious economistses[especially when their readers are directed to Lost Legacy too].

For the record Mark Thoma is correct about Vincent de Gournay’s role in popularising laissez faire among the French Physiocrats. Here is how I report it in my new book (in press) on Adam Smith(Palgrave Macmillan, 2008):

So where did the idea of laissez faire originate? Not surprisingly, the words were first uttered by a merchant in the French dirigiste regime of M. Jean-Baptiste Colbert (1619-1683), the French minister of finance under Louis XIV. The merchant’s name was M. Le Gendre, described as a ‘most sensible and plain spoken’ merchant and, reportedly, he responded to Colbert’s question: 'Que faut-il faire pour vous aider?' (what do you want from me to assist you?), with: 'laisser nous faire' (leave us alone). Colbert was the finance minister whose regulation of merchants was notorious for its oppressive licensing, inspection and control which personified French bureaucracy at its worst (plus ça change …).

Jean Vincent, Seigneur de Gournay, popularised a version of Le Gendre’s appeal to be freed of petty regulation, but the author who took Le Gendre’s words, dropped ‘nous’ and turned laissez nous faire’ (let us alone) into ‘laissez faire’ (let alone) into a principle of economic policy, was the Marquis d’Argenson (1694-1757), who was an active promoter of economic theory and a member of the world’s first economics club (salon), the Club d’Entresol (1726). He was also a Foreign Minister of France at the Court of Louis XV for two years. He did not publish his ideas, but circulated them, as was the custom, in manuscripts around the French intelligentsia. To govern better, he said, one must govern less. The true cause of the decline of our manufactures, he declared, is the protection we have given to them. Interestingly, Francois Quesnay, for example, did not include laissez faire in his General Maxims of Government.

Laissez faire’ was first used in English by George Whatley, a contemporary, friend and correspondent of Benjamin Franklin in 1774. Keynes reported that Jeremy Bentham in 1793 used the expression 'laissez-nous faire'. Bentham, who was not an economist, presented ‘the rule of laissez-faire, in the shape in which our grandfathers knew it’, adapted into the service of the Utilitarian philosophy. For example in A Manual of Political Economy, he [Bentham] writes: 'The general rule is that nothing ought to be done or attempted by government; the motto or watchword of government, on these occasions, ought to be - Be quiet ... The request which agriculture, manufacturers, and commerce present to governments is as modest and reasonable as that which Diogenes made to: Stand out of my sunshine.’

McGregor, D. H. 1949; quoting : Oncken, A. 1886
Quesnay, F. 1758.
Whatley, G. 1774
Keynes, J. M. 1926; Bentham, J. 1843. Works, p. 440

Wrong About Adam Smith and Laissez Faire in India

Sidin Vadukut, a lively columnist on The Hindu Business Line (here) (9 December), writes an avuncular piece mentioning Adam Smith:

Behavioural economics, conversationally described as the attempt to define or may be explain economic activity in the context of human psychology, sounds like a pretty spiffy science. But it has been around for a long, long time. Or at least since Adam Smith. (The Wealth Of Nations guy. Famous fellow. Famous book.)

Adam Smith is widely considered the father of modern economics. Or at least of the modern economics text book. His Wealth of Nations is still a seminal work and provides stellar rationales for free markets and laissez faire government policies.
Twenty years before he wrote his masterpiece, he wrote a less known book called the Theory of Moral Sentiments. I am not going to go into the details of the book. To simplify it to a line, Smith states that human beings develop certain natural laws based on a certain sympathy for the fellow man. He said that humans tend to put themselves in the other person’s shoes when making emotional choices.”

Not to be taken too seriously:

His Wealth of Nations is still a seminal work and provides stellar rationales for free markets and laissez faire government policies.”

Sidin Vadukut would do well to read yesterday’s piece on Adam Smith his laissez faire before he next makes such an incorrect statement.

Saturday, December 08, 2007

How Laissez Faire was Adam Smith?

Greg Whiteside writes in The Condo Metropolis Blog (7 December) here: “ADAM SMITH MUST BE ROLLING OVER IN HIS GRAVE RIGHT NOW”

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics. Translation: government does as little as possible and the natural laws of supply and demand will determine price levels and purge the market of any impurities. Very much a “might makes right” kind of approach. Admittedly, there are certain functions that government must perform in a regulatory capacity to keep the playing field level, but things seem to have gotten out of hand. Exactly like a drug-addict, we are addicted to economic intervention by our leaders.”

‘Rolling over in his grave’? Not quite. I’m glad Greg Whiteside began with ‘arguably’. He wasn’t so sure then, and he shouldn’t be because Adam Smith did not recommend laissez faire economics, though he had many opportunities to do so. He doesn’t mention laissez faire (leave alone; or ‘laissez nous faire’, leave us alone', in its original format) in Wealth Of Nations, nor in anything else he wrote, including his correspondence.

That he is reputed to be a proponent of laissez faire is a fault of the people who started this assertion on no other basis than they had not read Wealth Of Nations through, confining their reading to selected quotations. If they had read Wealth Of Nations they would find items on the following list:

To the generally accepted roles for government, Smith added others of a more controversial nature. For some, it is an issue of fundamental principle; for others it is a boundary dispute. Among these issues Smith identified:

● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’;
● Punishment and enforcement after acts of dishonesty, violence, and fraud;
● Sterling marks on plate and stamps upon linen and woollen cloth
● Enforcement of contracts by a system of justice;
● Wages to be paid in money, not goods;
● Regulations of paper money in banking;
● Obligations to build party wars to prevent the spread of fire;
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);
● Premiums and other encouragements to advance the linen and woollen industries’;
● Police or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’;
● patrols by town guards, fire fighters and of other hazardous accidents;
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours);
● Coinage and the Mint;
● Post office;
● Regulation of institutions, i.e., company structures (joint stock companies; co-partneries, regulated companies);
● Temporary monopolies, including copyright, patents, if fixed duration;
● Education of youth (publicly funded ‘village schools’, curriculum design,);
● Education of people of all ages (tythes or land tax)
● Encouragement of ‘the frequency and gaiety of publick diversions’:
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population;
● Encouragement of martial exercises;
● Registration of mortgages for land, houses, and boats over two tons;
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’;
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) ● Moderate export taxes on wool exports for government revenue

In short, Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles. He did not believe that the exercise of self interest ensured that social benefits would necessarily follow and he gave 50 instances in Books I and II of the malign outcomes of self interest from ‘merchants and manufacturers’, ‘rulers of mankind’, ‘legislators’ and people who influence them, ‘sovereigns’, and ‘employees of monopolists’. On historical precedent, the situation was not likely to change quickly. In fact it still hasn’t and, if anything, in many aspects it has got worse.

Living not far from where Adam Smith is buried in Edinburgh, I can report there have been no reports of any unusual disturbances from his grave site.

Friday, December 07, 2007

Tyler Cowen on Adam Smith

Tyler Cowen, a top economist blogger at Marginal Revolution (here) is interviewed by KnowledgeWharton (here)

Economics for Humans: Tyler Cowen on Using Incentives for a Better Life
6 December, 2007 in Knowledge@Wharton. I was struck by these two excerpts:

It's true that scientists get paid, but typically they don't get paid more, or much more, for discovering something that will make them famous. They do it because they love science, or because they want the recognition or because they just stumble upon it. Einstein was never a wealthy man but he worked very hard. So blogging is a new form of an old idea: that people do great things for free. Adam Smith didn't get paid much for writing Wealth of Nations, even though it's a long book that required a lot of work. He had an inner drive to get his ideas out there.”


“Knowlege@Wharton: Do you see an "inner economist" as a kind of ideal economist, someone who takes into account not only the financial facts but also moral concerns?

Cowen: Absolutely. Keep in mind that the first economist, Adam Smith, was also a moral philosopher. This is returning to the true roots of economics. I think it's the other economists who have been subversive. I'm just putting economics back to where it was in the first place and never should have left. Economics used to be a moral philosophy, very connected to the humanities.”

Adam Smith was not pressed for money. His life pension of £300 pr year from the Duke of Buccleugh from taking him on a tutorial tour to France and Geneva 1764-66 was more than sufficient to support himself and his cousin (Janet Douglas) in his mother’s house in Kirkcaldy while writing Wealth Of Nations (1766 to1774), and afterwards when he rented, Panmure House, just off the High Street in Edinburgh High Street (1778-90) (and still standing). He is reputed to have kept a ‘frugal table’ and welcomed guests at his Sunday dinners.

University salaries, and student fees, at the time would contribute about £170 a year, and he had some royalties from his Theory of Moral Sentiments(1759). He made no sacrifices to be a writer and he did not write for money (made irrelevant when he accepted the post of Commissioner of Customs in 1778-90 at £600 a year). He worked at the Customs House almost daily until a few months before he died.

Tyler Cowen is right: “He had an inner drive to get his ideas out there.

I especially liked the second quoted paragraph:

“Adam Smith, was also a moral philosopher. This is returning to the true roots of economics. I think it's the other economists who have been subversive. I'm just putting economics back to where it was in the first place and never should have left. Economics used to be a moral philosophy, very connected to the humanities."

This has got to be the right approach to economics today. Having abandoned so much of the field of political economy as seen by Adam Smith, many economists have retreated into a mystical imaginary world of their own, replete with mathematical abstractions far removed from how economies work with people in them.

The interview is about Tyler Cowen’s book, The Inner Economist. It has persuaded me to get it for myself this Christmas.

Thursday, December 06, 2007

Adam Smith Right On the Subsistence Ages of Mankind

An interesting exchange on Adam Smith and Karl Marx on a Comic Book forum, Comic Book Resources (here):

From ‘Player Zero’:

Adam Smith vs. Karl Marx
Actually if anything Marxism as he originally intended is actually much closer to realization than it has been ever before, the development of nations in the EU and Japan as well as that of China, India and Russia are actually evidence of this.

Unlike Maoism, Stalinism or Lenninism, Marx didn't advocate the immediate transferrance to communism but predicted an eventual and slow development towards communism, he specified that societies have a specific line of development: First comes feudalism where societies are run with agrarian economics and ruled over by kings and aristocrats, then comes capitalism with the development towards a manufactoring/industrial economy with the rise of the merchant class and secular governments, then comes socialism where social welfare programs and recognition on the importance of the working class, and then comes communism where the means of production becomes so advanced that everyone's economic needs are fulfilled

A reply from ‘Phrozen

“Except there was a lot of stuff before Fuedalism.

Fuedalism is not an economic system, its a government system. One that Marx didn't really understand that well or the actual history of well the world

Phrozen’ is right on the misuses of feudalism as a stage in the progression to socialism or capitalism in the Marxist litany.

Feudalism was a political regime that had economic features in land titles; it was not a mode of subsistence. It fitted Karl Marx’s political critique of capitalism but was deficient as a discriminator between modes of production.

Adam Smith’s theory of the ‘ages of mankind’ was a consistent discriminator between modes of subsistence.

He taught at Glasgow University the four-ages theory of the modes of subsistence:

1st the age of hunter-gatherers (‘rude society’; no property; equality of ‘poverty’; short life spans; violent social relations; bounties of nature as fee goods; labour as perfect rights; no laws, except the laws of nature);

2nd age of shepherds (appearance of limited property; early inequalities; mobility of territorial claims; limited civil government and laws; armed militas);

3rd age of farming (property established; civil government and laws; violent defence of property against the poor and the avarice of the rich; settled abodes; stone-based towns and public buildings; militias and standing armies);

4th age of commerce (civil government; laws and justice; state monopoly of violence; progress towards liberty; politics; end of ‘Malthusian traps’; rising per capita incomes with mechanisation, technologies, science and innovation; inequalities growth; appearance of middle-class; colonies; jealousy of trade).

Smith’s ages were subsistence based, compatible with various governmental forms (hordes; tyrannies; agrarian despotism; absolute monarchies, constitutional monarchies, secular democracies).

Feudalism did not alter the age of agriculture - food grew biologically the same in pre-feudal societies (‘allodial’ war lords;) as it did under feudal lords; limited tenancies; yeoman farming; agribusiness; communist communes, and so on.

His schema was a richer stratification of modes of subsistence, which also included possibilities of reversion from one mode to another (after the fall of Rome, Western Europe reverted to barbarism; stone-age societies reverted to wooden tools, as in Tasmania; capitalist commercial societies could revert to farming). See Book III Wealth Of Nations.

Phrozen’ is absolutely right!

Wednesday, December 05, 2007

A Tale of Two Views on John Nash





Gavin Kennedy

Here are two treatments of the same scene from ‘A Beautiful Mind’, one the conventional treatment by the scriptwriter and the other a criticism that sets the record straight – well, almost:

Russell Crowe and the Choice Supply Side Problem’ in EDUWONK (‘education, news. Commentary’) here:

Bar scene from A Beautiful Mind: What if no one goes for the blonde? We don’t get in each other’s way, and we don’t insult the other girls. That’s the only way we win. That’s the only way we all get laid.

Adam Smith said, the best result comes from everyone in the group doing what’s best for himself, right? That’s what he said, right? Incomplete. Incomplete! The best result will come when everyone in the group doing what's best for himself -- and the group.*” (Credited to ‘Guest blogger ggw’)

Eduwonk to its credit carries a kink to a promising criticism of the above in Hawaii Reporter (here):

“John Nash Biographers Defame Adam Smith's Beautiful Mind” by Stuart K. Hayashi (president of the Reason Club of Honolulu and an undergraduate in Entrepreneurial Studies at Hawaii Pacific University).

Many are familiar with the 2002 Best Picture winner “A Beautiful Mind” -- the real-life story of mathematician John Nash, who won the Nobel Prize in economics for his contributions in “Game Theory,” and who fought paranoid delusions for much of his life. This picture was based upon the biography of the same name, written by Sylvia Nasar.

It’s commendable that Nasar and the film’s makers wish to educate the public about schizophrenia and the brave struggles Nash endured for his very existence. Yet, with just a few sentences of text and dialogue, respectively, they have also done the world a great disservice by misleading people into believing that Nash’s work in Game Theory has disproved the practicality of free-market economics.
If policy-makers and the general voting public come to accept this inaccurate assertion, the ramifications could include the passing of new, unnecessary laws that harm us all.

Nasar and the film claim that John Nash’s ideas have refuted the “Invisible Hand” theory that Adam Smith, the first true economist, publicly explained in 1776. They get away with this due to what is, at best, a complete misunderstanding of what Smith said.

The “Invisible Hand” theorem is that a free market will regulate itself better than any mercantilist or socialist law would, thanks to the incentives it provides. Smith gave a number of examples, two of which are particularly famous.

First, Smith noted that it’s good for the consumer when businesses selling similar products or services learn to compete with one another, because each firm will reduce its prices and improve its quality to attract more customers. If a baker charges lower prices for bread than all other bakers, then the others have to lower their own prices or people will stop buying from them. It’s the self-interest of all parties involved that create the best condition for the economy in general -- the “Invisible Hand” of profit motivates it.

Second, Smith stated that, when one can serve his own self-interest by cooperating with others, he will do so. If Bob the baker wants $5 more than his loaf of bread, and Steve the customer wants a loaf of bread more than his $5, the two make a trade -- Steve buys Bob’s bread. Each person gives up what he wanted less, and ends up with what he wanted more, so both sides win.

These parties may not necessarily like each other, but they cooperate to serve their own respective self-interest, and, as long as no one’s rights are violated, everyone is better off. “The Invisible Hand” works again.

Nasar, the filmmakers, and some anti-capitalist Game Theorists get away with saying Nash refuted Adam Smith by remembering the first example, taking it out of context, and then ignoring the second. According to “the Nash equilibrium,” an individual will look at his own self-interest to decide whether to compete or cooperate with others.

For instance, imagine there are two men in a forest, who could hunt for rabbits or deer. This is a “Game Theory” scenario. If they each hunt for a rabbit alone, they will eat a little. To catch a deer requires both of them to cooperate, so, if they both work together to catch a deer, they’ll both eat a lot and “win big.” But if one man gets the other to hunt for deer while he hunts for rabbit instead, the rabbit-eater will eat and “win,” while the deer-hunter will end up with nothing and “lose.” The best solution for both men, said Nash, is not to compete but to work together to catch a deer, serving everyone’s self-interest best.

Ludicrously, Nasar and the filmmakers insist this refutes Adam Smith because the parties cooperate rather than compete. But that’s a “straw man” argument, because Smith never said that people always have to compete; he just said that competition between firms in the same industry benefits consumers.

And Smith also pointed out that self-interest motivates different parties to cooperate, helping everyone in the community, such as in the example of people making mutually beneficial business transactions. No matter the spin that the Hollywood Left and some anti-capitalist Game Theorists try to put on this, the “Nash equilibrium” somewhat affirms Smith’s “Invisible Hand” theory, whether Nash himself realizes it or not.

Nash has never refuted the free market. Nor will any of his students.

Adam Smith himself made mistakes in economics, but he had a beautiful mind too, and Hollywood would do us a favor if it didn’t misrepresent it anymore.”

Regular readers should know what is right and what is wrong with Stuart K. Hayashi’s, otherwise excellent rebuttal of the scriptwriters of ‘Beautiful Mind’ and Sylvia Nasar’s biography (assuming it contains the original errors in that scene).

Everything is fine in the rebuttal except Stuart’s continual references to the ‘invisible hand theorem’ of Adam Smith. He didn’t have a ‘concept’, a ‘theory’, a ‘principle’ or a ‘theorem’ of an invisible hand.

What he had was a metaphor and he wasn’t referring to markets or decisions in markets (these were discussed in Books I and II of Wealth Of Nations. He used the famous metaphor in Book IV on an entirely different subject after he had clearly explained what drove merchants to prefer to avoid trading abroad, namely their risk aversion.

Sometime in the mid-20th century in academe the invisible hand was promoted from Adam Smith’s use of it into a ‘concept’, a ‘theory’, a ‘principle’ and a ‘theorem’ of markets, and the rest as they say is ‘history’. It became what its proponents wanted it to mean – the proselytizers after all were graduates of the schools that adopted it and they taught it to their students, neither their teachers nor their students bothering to read Wealth Of Nations.

The metaphor is redundant as an explanation of markets; it adds nothing to our understanding of how they work. It introduces a ‘disembodied invisible body part’ into what claims to be a science and which goes to great lengths in its mathematics to ‘prove’ it is, or looks like, a science. It’s as if scientists explained gravity by an ‘invisible being’ carrying the world on its shoulders (oops, they did several hundred years ago, but science grew up and learned better).

But, meanwhile congratulations to Stuart Hayashi for understanding what is wrong with the alleged views of John Nash as represented in ‘Beautiful Mind’.

Monday, December 03, 2007

Globalisation Not the Problem: Absence of Markets is the Problem

Stan Sorscher, guest columnist for the (here)and a labor, trade and health care activist who lives in Seattle, writes that ‘Even powerful, efficient markets fail’:

More than 200 years ago, Adam Smith explained how markets create broad-based well-being. The self-interest of the butcher, baker and brewer brings them wealth, which is ultimately invested or shared in their communities. Of course, 18th-century merchants were strongly connected to their communities.

Globalization breaks that connection and decouples the powerful and efficient market forces from the public interest. Today's baker, butcher and brewer are multinational companies, which proudly regard themselves as global companies. Their obligation is to their global investors, not to local communities.

This local community interests idea is becoming quite popular, as if it is different now from what is was in Adam Smith’s day. Of course the scale has changed dramatically but in essence it was discernable in the 18th century too.

In the lesser known example of the manufacture of the common labourer’s woolen coat, Smith adds another dimension to the pin making example of the division of labour, and possibly a more important example because it illustrates the benefits of specialization and round-about-methods of production.

Living off locally produced food in the shape of butcher’s meat, beer and bread, may have had advantages in that without distant trade that was all there was to consume. Some extremists even recommend going back to locally produced food only (no more scotch whisky in Seattle then!) and, interestingly no more coarse woolen coats. The wool may have come from local sheep but the processes that turned wool into wearable costs involved many trades and merchants who did not live locally.

In the table I have summarized the individual contributors to the manufacture of a woolen coat in the 1750s (from Wealth Of Nations, Book I, chapter 1, pp 22-4):

"Manufacture of a Coarse Woollen Common Labourer’s Coat

Direct Trades: Shepherds, Sorters, Pickers, Wool combers or carders, Dyers, Scribblers, Spinners, Weavers, Fullers, Dressers, Taylor, Wool Gatherer, Grazier, Clippers;

Merchants and Carriers: shipbuilders, sailors, Sail Makers, Rope Makers, Navigators;

Machines and tools: Complicated machines for sailing, Mill of the fuller. Loom of the Weaver, Shearer’s Sheers;

Indirect Trades: Builders of the Furnace, Fellers of Timber, Burners of Charcoal, Brick Layers, Furnace Attendants, Mill Wrights, Forgers, Smiths, Bakers, Brewers, Glazers, Tool Makers, Workmen Producing all Convenience, Coopers, Tanners, Sowers, Reapers, Tree fellers;

Conveniences of Life of Labourer: Coarse Linen Shirt, Leather shoes, Bed, Kitchen Grate, Coals, Kitchen Utensils, Table Furniture, Knives and Forks, Earthen delft or Pewter Plate."

Most of these people did not live and work locally and some were in distant lands. In short, living standards, basic as they were, depended on distant markets. Globalisation is not that new. When markets were absolutely local living standards were dire.

British colonies in America were prevented from developing local manufacturing by mercantile policies enforced by the British government, which Adam Smith criticized, though he advised the newly independent United States not to impose tariff barriers to keep out imports of manufactured goods in pursuit of a dash for self-sufficiency, but to allow time for a domestic manufacturing capability to take root and grow naturally by engaging in distant trade itself.

Becoming self-sufficient is to go backwards to the world that was left behind, with world population levels close of the hunter-gatherer societies of 11,000 years ago, and living standards to match. It took the best part of 10,000 years to lift per capita consumption above bare subsistence to continual increase for the majority of the population of European countries (principally, Britain and its American colonies) in the 16th century, and towards sustained growth in consumption, knowledge, sanitation, health, medicine and technology from the 1800s.

That the rich are the main beneficiaries of growing GDP is nothing new; it has ever been so, right through the shepherding, farming and commerce millennia. The rich have hived off surplus GDP from the beginning of the modern ages. Apart from personal consumption levels much greater than the average (poor) majority, they also created what we know of recorded, literate, history. If there was another way to achieve these gains it never happened anywhere in the world at any time.

Commerce changed all that. For the first time ever, per capita growth enabled the poor majority to reach per capita income levels unprecedented in all history. This was not market failure; it was market success. The fact that there is widespread inequality is not new: it was unequal once humans left the equality of the hunter-gatherer mode of subsistence. The price of opulence was paid largely by the poorer majority, but from the 1800s, in Europe and North America, the steady march towards opulence has resulted in the living conditions that enable Stan Sorscher to send his views over the Internet to people like me in Edinburgh, Scotland, and for me to comment upon them.

Income inequalities are real problems, though I am bound to say that the real problems of relative and absolute poverty are not those between Stan Sorscher and the ultra-rich of North America (5 billion people would gladly change places with him); they are between Stan Sorcher and the poor of the non-developed (and non-developing) countries outside the ambit of the country that Stan lives in. Smith made exactly the same point in Wealth Of Nations (1776) in the contrast between the gap between the poor labourer in Scotland and the rich European prince, which was smaller than the gap between the poor labourer in Scotland and ‘that the absolute master of the lives and liberties of ten thousand naked savages’ in Africa (WN I.i.11: p 24).

If that problem concerns Stan (it does me) then the solution is not to return to self-sufficient living standards in Seattle (or Scotland). The cause of the differences is not racial, nor geographical, or such like. It lies in the success of the division of labour in markets in the developed countries, and their undeveloped state in Africa (or wherever).

Markets do not cause these problems, they are part of the solution, but most decidedly the absence of markets most certainly does cause poverty.