Behavioural Economics Wouldn't Break Adam Smith's Heart

Heidi Dawley writes in Media Life (popcult) HERE:

‘Simple fact is, we're fools with money’

‘We like to think we make rational buying decisions’

‘We as human beings are highly rational, and the belief we share in that rationality pervades our every thought and action across countless decisions each day, minor and major, from the $4 cup of latte we pick up on the way into the office to the really great deal we just got on our new flat screen TV, with free shipping.

Now here’s some disappointing news. That's all hooey.

This grand notion of rationality is entirely in our heads. In reality, we as humans are predictably irrational in our decision-making process, and that's proven over and over again by the poor buying decisions we make. We overpay, we buy things we don't need. And perhaps most discouraging, we never seem to learn from our mistakes.

In short, we're kidding ourselves about our ability to make rational buying decisions.

“The idea that we could compute all the possible options of every motion and decide what the optimal course of action is – I just think it’s inhumane,” says Dan Ariely, a behavioral economist at MIT and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions," a new book on how consumers really behave in the marketplace.

“We are just starting to understand that the reality that we experience is not just about what’s out there. It is about what we create.”

This of course hardly comes as news to marketers, whose very expertise is in persuading people not only to buy their products but to rest in the comfort that they made the wisest decision.

As a behavioral economist, Ariely looks beyond theory--say, Adam Smith's writings on capitalism and how it works or ought to work in the grand scheme of things, to how things actually work based on observing consumers in action.

It's enough to break Smith's heart, were he to return. A lot of Ariely’s experiments show just how much consumers are swayed by what they choose to believe versus the facts at hand. Call it willful self-deception. While believing they're weighing the evidence at hand, they often reach back into memory--all those associations built up over years--to make decisions.”

Comment
Heidi Dawley should relax her language at least in reference to Dan Ariely’s research: ‘to break Smith's heart, were he to return' is part of the problem for modern economists attempting to cope with the burgeoning evidence that the belief in Homos Economicus is not founded in studying human behaviour, but more important it’s not something that Adam Smith believed in either, for which there is plenty of written evidence in his works.

In fact, it is a travesty of Adam Smith’s thinking to assert as many modern economists do that Wealth Of Nations is founded on ‘the granite of self-interest’ (George Stigler, Nobel prize-winner).

The popularity of Homo economicus among neoclassical economists, and apparently accepted by most of a mathematical disposition, has more to do with it being easier to model a maximization of self-interest for predictive purposes using calculus, but the predictions that are derived apply to the highly simplified and abstract construct at the root of the theory and not to any identified or identifiable human being out of six billion on the planet.

Paul Graham's Disagreement Hierarchy (thank you Dani Rodrik)

From Dani Rodrik’s Blog (HERE) a most useful hierarchy of levels of disagreement is offered from Paul Graham’s Blog:

‘How to Disagree’

’The web is turning writing into a conversation. Twenty years ago, writers wrote and readers read. The web lets readers respond, and increasingly they do—in comment threads, on forums, and in their own blog posts.

Many who respond to something disagree with it. That's to be expected. Agreeing tends to motivate people less than disagreeing. And when you agree there's less to say. You could expand on something the author said, but he has probably already explored the most interesting implications. When you disagree you're entering territory he may not have explored.’

Comment
The list runs from: DH0: Name-calling, through to DH6: Refuting the Central Point. I have not reproduced it because it deserves a wider consideration (HERE).

Readers of Lost Legacy will note that I often disagree with posts from authors of Weblogs or postings in the main stream media about their interpretations or repetitions of the interpretations made by others about Adam Smith.

Sometimes I may get carried away by my exasperation (for which I apologise) but with Paul Graham’s hierarchy to refer to, I shall try in future to improve my arguments by climbing up his hierarchy of disagreement.

Readers are invited to remind me when I slide down Paul Graham's hierarchy, provided they ensure they rise towards the top in their reminders!

Shallow Psycho-babble and the Invisible Hand

Graeme Anfinson of North Dakota (29 March) writes in Left in East Dakota (‘I woke during my American Dream’) here:

‘Adam Smith the populist’

‘Michael Perelman's The Invention of Capitalism … destroys the myth that classical economists were against government economic intervention and points out that in order for market capitalism to develop, state power was needed to force a largely self-sufficient society into selling their labor for wages’.

Comment
If the State caused people to become wage-labourers from the 15th century to the appearance of capitalism in mid-19th century Britain (and elsewhere) it is a remarkable first in the history of the State, showing a consistency of purpose unarticulated in published sources, and a remarkable success across all States of varying types in countries across the globe.

Graeme quotes directly from Michael Perelman's, The Invention of Capitalism, page 208:

“I suspect that Smith's work earned much of his popularity because he expressed so eloquently what others deeply felt. Unlike many of the less educated populists, Smith was usually able to sublimate his rage into his charming theory of the invisible hand, in which competition and even aggression is channeled into harmonious actions that better the world. Frequently, cracks appeared in this fantasy, and the harsh reality of the world around him intruded. At such times, we can catch a glimpse of Smith's theory of primitive accumulation.”

Comment
Michael Perelman apparently is confusing what some 20th-century economists invented as a theory of Adam Smith’s when it was anything but a ‘theory’ (or any of the other elaborations as a ‘paradigm’, ‘concept’, or whatever), as if Wealth of Nations is riddled through with the metaphor of ‘an invisible hand’.

That his ‘charming’ metaphor is entirely absent from his theory of commercial markets (Book I and II) and makes a single appearance in a single paragraph in Book IV at the tail-end of an analysis of the consequences of risk avoidance is not well known, even among talented and senior economists as Michael Perelman, is amazing, though the new invention of it being caused by Adam Smith’s ‘sublimated rage’ is, er, of historic proportions.

Talk about history being but a fable agreed upon…

“Smith's vision of the bizarre heroism of the petit bourgeoisie seems to reflect his own rage at those who refused to adopt the values that were so dear to him. Even if Steuart's [Sir James Steuart] language was brutal, I suspect that society has more to fear from the repressed emotions of someone like Smith. His metaphor of the invisible hand may be relevant in this regard. We may equate friendship with an open, outstretched hand, but an invisible hand has something sinister about it. In this spirit, Macbeth requested that the darkness of night, "with thy bloody and invisible hand," cover up the crimes he was about to commit.’ ”

Comment
Note how Adam Smith’s metaphor is no longer a ‘charming theory’; it’s now only a metaphor, which is how it always was for Adam Smith. Michael Perelman has at least read Emma Rothschild’s classic, Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment, Harvard, 2001 (or the earlier American Economic Review article, 1994) and should know that beside Shakespeare’s use of the invisible hand metaphor, its use is well known in literature, going back to classical times, and fairly common in the 17th-18th centuries.

Perelman resorts to phycho-babble: ‘I suspect that society has more to fear from the repressed emotions of someone like Smith’ and derives from this that his belief that ‘his metaphor of the invisible hand may be relevant in this regard’.

Good grief! Therapy upstages good-old basic reading of the original source to derive the meaning of a text.

Graeme Anfinson, a self-proclaimed leftist, asserts that he ‘can't recommend Michael Perelman's The Invention of Capitalism enough’. With the above selection’s from it, I can see why. Leftists have a conspiracy bias hardwired into their beliefs about the working of commercial societies and adding psycho-babble gives it a touch of modernity.

Backward Projection of a 20th-Century Myth

Political Lore (here) : 29 March, by Shaun Pickford:

“In the “Wealth of Nations”, Adam Smith believed that a successful nation’s free market will be guided by “an invisible hand”. In studying Adam Smith’s economic philosophies, the Founding Fathers of the United States kept the government out of the free market by writing no laws and regulations restricting any aspect of the market within the country. They knew that if they let this “invisible hand” run its course, the newly formed American economy would flourish. With nothing to hold them back, the Patriots of the country could specialize in anything of their choosing, develop a niche market and become a staple in their communities for their trade. The “specialists” would prosper, as would the others in their respective trades, thus developing a strong, sustainable, wealthy community that would later become a shining example for capitalism and free markets around the world.”

Comment
This is an example of a 20th-century backward-looking projection onto Adam Smith of a myth created by, among others, Chicago economists, and which is now well ingrained in public lore as to be a parody of Adam Smith’s analysis of how markets work.

Adam Smith’s ‘philosophies’ were a critique of mercantile political economy which had dominated English/British government policies for three centuries (and, it should be noted, was carried on in effect almost without interruption through to the 21st century, including until the mid-20th century, the mercantile policy of colonies, and their associated wars).

There are no references to invisible hands in Wealth Of Nations except once in Book IV (page 456 – read the whole chapter and not just the paragraph) which addressed another matter (risk avoidance) and not free markets.

The Founders had copies of the UK edition of Wealth Of Nations in Autumn of 1776. They did not ‘know’ about invisible hands and about the beenfits of letting them ‘run their course’. The metaphor was almost unremarked upon until the early 20th century, after which it was imaginatively created into a ‘theory’, a ‘concept’, a ‘paradigm’, and an ‘axiom’, by soem economists, which is rather mysterious as it was none of these to Adam Smith.

Please Note: Shaun Pickford’s article is under the heading: “Obama plans to shield us from ourselves in 2008, and ultimately destroy the “Shining City on a Hill”.

My criticism of the above aspect of the article in no way should be taken as a political comment on the merits of Barack Obama, or any other Presidential candidates. Lost Legacy does not comment on the merits of candidates in any country other than the one I vote in.

Correct Vision of Outsourcing (though not about Adam Smith)

In the 360° Vendor Management Blog (An Outsourcing Vendor’s Business Continuity and Disaster Recovery Plan) HERE: there is an article on outsourcing, which correctly notes that it is developing poorer economies and providing markets for richer countries. It’s what happens next that is crucial: legislate against outsourcing and ignore the opportunities to innovate into further degrees of ‘round-about’ production to add to future disasters’ or use the opportunities to increase market specialization.

“Pro-Globalism View of Outsourcing and Outsourcing Critics”

‘Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox. The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages. These wages improved, creating new economies in once poor countries.

Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.

Your only choice is preservation of self-interest - to become rich and wealthy through innovation.

In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.’

Comment
Now the metaphor of the invisible hand ‘contains a balancing paradox’! Adam Smith’s use of an invisible hand (Wealth Of Nations IV.ii.9: p 456) was about the consequences of risk avoidance among traders who preferred the domestic trade to foreign trade. No paradox was involved.

If this is meant to be about growth then it may well be on to something, but Adam Smith did not feature the metaphor in his chapters on growth (Books I and II). Allyn Young’s 1928 article in the Economic Journal explains brilliantly what Smith was saying about the role of the division of labour and specialization and innovation that more correctly addresses the point that 360° is advocating.

I agree that ‘self-interest is tied to creation, not preservation’ if this means that self interest should be tied to innovation. That it isn’t underlines my remarks in the previous post that self interest is not a catchall synonym for something that always has ‘positive’ outcomes.

Unless we realise this, unlike the Chicago epigones who have created a different Adam Smith than the man born in Kirkcaldy, we could make errors in equating a business person’s, any and every business person’s, behaviours and actions as being in the best interests of society. They may be and should be so but the evidence suggests they are not always so.

Which is not an error that the Kirkcaldy Adam Smith never made.

Misuse of Adam Smith's Name Again

On Jim and Joe’s Authenticity Journal (HERE)

‘Doing Good by Doing Well’ by Joe Pine quotes The Economist: ‘How good should your business be? Ethical Capitalism’

‘Some people complain that this sort of “good corporate citizenship” is merely another form of self-interest. Correct — and good. That’s the way capitalism works. Adam Smith was right: Businesses have done more good for the planet by pursuing their own self-interest than any other earthly entity.’

‘A dangerous myth is gaining ground: that unadorned capitalism fails to serve the public interest. Profits are not good, goes the logic of much CSR; hence the attraction of turning companies into instruments of social policy. In fact, the opposite is true. The main contribution of companies to society comes precisely from those profits (and the products, services – experiences and transformations too! – salaries and ideas that competitive capitalism creates). If the business of business stops being business, we all lose.’

Comment
Generalisations like those above can be misleading because they ignore the defects in the perfections claimed in them, enabling them to make extravagant claims.

‘Adam Smith was right: Businesses have done more good for the planet by pursuing their own self-interest than any other earthly entity.’

It’s not quite what Adam Smith said. His main criticisms of a certain number of ‘merchants and manufacturers’ are well known, specifically their proclivity for creating monopolies, for their ‘narrowing the market’, for their lobbying for tariff protection, and for their misrule in India. Hardly rallying cries for them ‘pursuing their own self-interest’.

Adam Smith supported competition in markets and was not slow to point out that the worst interferers in markets and the most dogged opponents of competition were 18th-century businessmen and their allies among legislators and those who influenced them.

The problem with statements like ‘Businesses have done most good for the planet’ that this ignores those businesses that have pursued ‘their own self-interests’ and who have undone much of the good that competitive businesses could do for the planet if they represented the overwhelming majority of their ilk.

The sentence ‘If the business of business stops being business, we all lose’, would have needed severe qualifications in Smith’s day. Can we really say that it does not require similar qualifications today?

Article on Adam Smith v J.J. Rousseau on Morality

From Sky of Ashes Blog (here, there is notice of an interesting article on “Commerce and Corruption: Rousseau's Diagnosis and Adam Smith's Cure" by Ryan Patrick Hanley (Marquette University, Ryan.hanley@marquette.edu).

Abstract:
‘Modern commercial society has been criticized for attenuating virtue and inhibiting the ethical self-realization of its participants. But Adam Smith, a founding father of liberal commercial modernity, anticipated precisely this critique and took specific measures to circumvent it. This article presents these measures via an analysis of his response to the critique of liberal commercial modernity set forth by Rousseau. It principally argues that Smith's distinctions of the love of praise from the love of praiseworthiness, and the love of glory from the love of virtue, were elements of a normative moral education that sought to elevate civilized man's corrupted self-love, and thereby recover within modern commercial society a respect for ethical nobility.’

Comment
The article is accessible from Here.

It is by subscription ($15 for downloadable access) from Sage and worth the price to read of this relatively neglected area of Adam Smith’s contributions. It raises an issue that underlies much of the controversy about morality and market economics, especially capitalism, but which is seldom discussed in context. As such it is enduring interest today.

News on the New Adam Smith Statue from New Zealand

Paul Walker (26 March) in The Anti-Dismal Blog(‘A blog related to all things to do with economics and related subjects’ in New Zealand) about the Adam Smith statue to be erected in Edinburgh in July this year (complete with picture).

He also posts on Adam Smith appearing on the Bank of England's £20 note. Adam Smith was also is in fact the first Scot to adorn an English banknote, and the first economist, and he appears on the Scottish Clydesdale Bank £50 note too, and both are clearly illustrated in Paul Walker’s post.

See all three ilustrations HERE.

New Book on Markets

Eamonn Butler, Director of the Adam Smith Institute, and author of ‘Adam Smith – a primer' (which I was so impressed with that I was delighted to write the introduction), is about to publish his latest book with the catchy title:

‘The Best Book on the Market: How to stop worrying and love the free economy’.

It is written inEamonn Butler's inimitable short, fun, anecdotal and accessible style.

He covers the basics about choice, competition and entrepreneurship, and prices, and aimes it at spreading understanding among the public, students – even politicians – that markets are actually a good thing.

John Blundell of the Institute of Economic Affairs says it ‘Vividly and simply explains competition, entrepreneurship and prices’.

Václav Klaus, President of Czech Republic, says that it presents solid arguments against government attempts to 'perfect' markets by obstructing competition and private ownership.

The former UK Chancellor, Lord Lawson, says ‘Anything which educates the public and politicians on how the free economy actually works is always welcome’.

I shall write a review of it for Lost Legacy soon.

Another Case of Invisible Hand Confusion

In a muddled melanage of authors quoting others I find in The American Strategist (here) that a
Patrick Doherty (here): quotes Steve Clemons quoting: William Pfaff (20 March) here:

'‘Adam Smith was the author of the theory of the invisible hand that guides unregulated markets to produce the optimum result, but he took for granted that the hand was clean.’

Comment
Nowhere in any of his books and writings did Adam Smith assert such a theory of a role for a disembodied body part.

The invisible hand is a metaphor for how individual merchants cope with their risk avoidance when choosing whether to trade locally or to trade abroad.

Adam Smith On Government

John Chapman (24 March) writes on AEI (‘American Enterprise Institute for Public Policy Research’) from Washington DC. (HERE)

“Economic Stimulus v. Economic Growth”

What drives economic growth? Adam Smith made this question the centerpiece of his famous book in 1776, entitled An Enquiry into the Nature and Causes of the Wealth of Nations. Smith's comprehensive answer, confirmed by David Hume and further elucidated by David Ricardo and John Stuart Mill, has been borne out in the centuries since. Modern economists would describe Smith's book, and indeed the classical vision more broadly, as one highlighting the institutions which drive growth, summarized as follows:

• Private property and limited government--Smith was a keen student of John Locke, who eloquently enunciated a natural right to liberty and property, rooted in the very nature of man. For Smith, in fact, property and limited government were the cornerstones of a system of natural liberty, and a necessary condition for the advancement of civilization itself. From the vantage point of the economist, property implies private ownership of the means of production (capital), and limited government implies a regime of low taxation and regulation. With this institutional backdrop, in fact, proper incentives are in place to guarantee maximal economic growth via development of other necessary institutions undergirding a society based on liberty
.
These are the necessary and sufficient institutional conditions which guarantee maximal growth in an economy (Keynes himself would agree, differing only regarding the relative stability of a market economy and government's role). Effective economic policy, both fiscal and monetary, thus consists in fully promoting this institutional mix.”

Comment
What claims to be about ‘classical fundamentals’ is suspiciously familiar as a modern presentation that relies on the association of ideas about Adam Smith rather than reflective of them.

“Private property and limited government”

Adam Smith certainly favoured private property in that the emergence of society from the Age of Hunting was what brought about the idea of property, and each successive Age (Shepherding, Farming and Commerce) developed the existence of property into ever more sophisticated forms.

That he favoured ‘limited government’ in the same sense (if at all) as a principle is a more complicated notion and a more questionable assertion. To some extent the assertion is brought about because of the detailed rebuttal of mercantile political economy in Book IV of Wealth Of Nations and his account of the roles of government in Book V, reflecting a far more primitive commercial economy in the 18th century than what may be required in the 21st century.

Mercantile governments from the 15th century pursued policies which inhibited optimal economic growth, evident in the 18th century when he was writing. These policies manifested themselves in the forms of the national pursuit of gold, instead of enhancing the annual output of the ‘necessaries, conveniences, and amusements of life’ (which we call GDP), of a ‘balance of trade’, by which was meant avoiding importing more than was exported, of ‘jealousy of trade’ by neighbours, seen as rivals rather than as partners, of the concomitant policies of protection, tariffs and prohibitions, domestic monopolies, and narrowing markets against competition, the Settlement Laws, the Apprenticeship Statutes, Primogeniture and Entails of land, and colonies and their associated wars.

These policies were seen by Adam Smith as a considerable burden of the wrong government policies, not a burden of government in itself.

Government was necessary for a vibrant economy in the stability of laws protecting property, defence capability to protect the nation, a nation-wide system of justice (without which society would ‘crumble into atoms’), and the promotion by the state of public works and public institutions of education, health, and the dignity of the sovereign. These too added to a formidable extension of government in the 18th century, funded by taxation and borrowing.

Given the state of Britain’s roads, harbours, bridges, streets in cities, lack of sanitation and such like, there would have to be a substantial increase in public expenditure just to get the infrastructure in place to facilitate commerce.

Those who link Adam Smith to ‘limited government’ have not appreciated (perhaps have never read) Wealth Of nations, Moral Sentiments, and Jurisprudence.

Be clear, the reason for relying on government was because individual private capital was in the main not large enough in the 18th century, and while government capital (from taxation and borrowing) was large enough, much of it was wasted on the above mercantile policies including the maintenance of colonies in America and the expenditure on foreign wars.

Adam Smith estimated the cost to Britain of the Seven-Years War with France was £175 million pounds. If this capital had been applied to increasing domestic output and productive employment in profitable enterprises, and the profits devoted to growth and not to prodigality and government waste, Britain would be able to ‘spread opulence’ that much sooner than it was likely to do if present arrangements and habits continued.

News About Adam Smith's Edinburgh Statue

Eamonn Butler, Director of the Adam Smith Institute announces today the unveiling date for the statue of Adam Smith on 4 July in Edinburgh, which was made possible by the Adam Smith's Institute's fund raising campaign from private sources (no taxpayers' enforced subsidies!) here:
http://www.adamsmith.org/blog/

“The Alexander Stoddart statue ‘currently in the workshops of Morris Singer, the specialist art founders, where sculptor Alexander Stoddart has been adding some finishing touches. According to Stoddart it is one of the best castings he has ever worked with, faithfully reproducing every detail of his original model.”

Eamonn Butler’s post includes a remarkably impressive photograph of the completed statue (here), and description of its showing ‘Smith in later life – he spent the last twelve years of his life in Edinburgh, where he had been appointed a Commissioner of Customs, which might explain his slightly stern look’.

There is even a sublimal references ‘in the work to Smith's support for trade with America. His neckware is modelled on that worn by Thomas Jefferson, his wig on a likeness of George Washington’, which makes its unveiling on 4 July more than coincidental.

The unveiling promises to be an international event of global importance, which may be particularly pleasing if anything emerges on 4 April from the purchase of Panmure House, Adam Smith’s former residence, further down the High Street, and not far from his grave site, that associates its renovation with his life’s work.

Now is the time for readers to consider a visit to Edinburgh around 4 July to participate in the celebrations – there will be many, including both serious academic conferences and ‘lighter’ gatherings. You can be sure that Lost Legacy will host at least one such event.

Economists Require Help in Understanding the Evolution of Value

In the introduction to my ‘Adam Smith: a moral philosopher and his political economy’ (Palgrave Macmillan, in press for July 2008), I include this observation about the state of modern economics:

“Adam Smith was much more than the contents of the five books of Wealth Of Nations, significant and profound as they are; he composed an integrated theory of society, recognisable today by anthropologists, sociologists, evolutionary psychologists, linguists, historians and philosophers, who are not normally avid readers of economics. If economists abandon large swathes of territory on what are regarded as distant and unrewarding frontiers of our discipline, we ought not to be surprised if they become peopled by migrants from other disciplines, who bring not just their energies but also their insights, and a willingness to incorporate into their own frontiers what economists neglect and leave fallow. It has been ever thus with declining ‘empires’.”

Something like his theme is often commented upon within and outwith the profession. I have been arguing thus for over ten years. In 1997, I was following up an interest in the history of bargaining from my professional work in negotiation training and consultancy (based on the conditional proposition outline by Adam Smith in Book I of Wealth Of Nations) by reading a few general articles on the behaviours of primates, such as Chimpanzees and Baboons, and I was struck by comments by their authors about dominance, alpha males and females, coalitions, hostility to intruders from other bands, and the exchange of rare sexual favours for the meat of recent kills.

This took up the best part of a year or two up to 2000, from which I turned to the descent of hominids and humans from the common ancestor. (I had been sidelined from professional work by a small stroke episode and had time on my hands for many months, fortuitously). The outcome was an unpublished manuscript, ‘The Pre-History of the Deal’, which fell between the marketing comment of several publishers that nobody was interested in a book by an economist on social-evolution, anthropology and primate behaviour, because specialists wouldn’t read it, nor would economists because they did not do such subjects.

In the intervening years, having returned to work, I have noticed several books (for example: The Company of Strangers) covering precisely this territory, and, as an economist, I also know that the few economists who have taken notice of bargaining quickly slid off into game theory and mathematics, which are pretty lifeless about the real world of bargaining with which I am familiar – those that teach the maths do not do real bargaining, except in short games for petty stakes.

Since retirement in 2005, I have been working on Adam Smith’s corpus, and it is not accidental that I have come full circle in respect of Adam Smith’s close interest in how society evolved through his four ages, from Hunting, Shepherding, Farming and Commerce, how languages evolved, how philosophy evolved and how history and political economy evolved. Indeed, Adam Smith, as Jim Otteson showed in his ‘Adam Smith’s Market Place of Life’ (Cambridge University Press, Cambridge, 2002), wrote his entire series of Works using a common theme of the unintended order of social life, an assessment with which I concur. I recommend you read Jim Otteson’s excellent book to open your mind to the real political economy of the real world.

This month, Paul J. Zak (editor), publishes articles by fifteen scholars, who work at and across the abandoned frontiers of economics from various related disciplines: Moral markets: the critical role of values in the economy, Princeton University Press, Princeton, New Jersey, and Oxford, England.

I am working my way through it and I am well pleased overall (of course, I see some small areas of contention, but nothing too serious). The book is divided into five parts: ‘Philosophical foundations of values’; ‘Nonhuman origins of values’; ‘The evolution of Values and Society’; ‘Values and the law’; and ‘Values and the economy’.

I have complete Book I and shall complete the other books over the next few weeks (I am busy with other projects too – who said that in retirement you get bored with too much time doing nothing?).

Amazingly, economists write about ‘value’ and demonstrate confusion of what they mean by value, which leads to dense fogs of confusion, as I know from compiling a paper on ‘Adam Smith’s Theory of Bargaining’ for the History of Economic Society’s 35th Annual Conference in Toronto this June (which readers may wish to consider attending - details from here.

I shall write sections of a review here, and look for other reviews of Paul J. Zak’s collection in Blog land.

Brad Delong on Karl Marx and Adam Smith

Sic Semper Tyrannis (‘just another Wordpress.com weblog)
Nathanjmorton reports: on ‘Brad Delong on Karl Marx’ here:

‘First, Marx the economist was among the very first to get the industrial revolution right: to understand what it meant for human possibilities and the human destiny in a sense that people like Adam Smith did not.

Second, Marx the economist got a lot about the economic history of the development of modern capitalism in England right–not everything, but he is still very much worth grappling with as an economic historian of 1500-1850.’

[Original was written by Brad Delong: “Karl Marx as Moralist-Prophet: Morning Coffee for Good Friday” (here)].

Comment
I don’t disagree often with Brad Delong but I have some concerns with his comparison of Karl Marx to Adam Smith.

There is much debate about the origins of the so-called ‘industrial revolution’ and even the dates when its first appeared and reached its full effects. That Karl Marx was able to make a full account of its effects on the economy, and later, on the world, is not difficult to explain. By the time that Marx was writing about it (from 1848), the effects of its substantial impacts were almost self-evident. By the time that Adam Smith was researching the history of the British economy (1748-76) there were precious few signs that indicated what was beginning to happen.

Smart modern economists, with the full panoply of research tools available to them on their desktops, blame Smith for not being aware, or worse, deliberately ignoring, the ‘many signs’ of what became known as the ‘industrial revolution’. They ignore the evident facts that a single local large manufacturer (Carron Iron, near Falkirk), mainly casting iron products using known technology, did not a ‘revolution’ make.

Adam Smith knew its owner, Dr John Roebuck, and exchanged correspondence with him as well as meeting him over the years, and it seems Roebuck didn’t know he was riding point for the coming revolution, or if he did (unlikely), Smith did not pick up his proclamation. Adam Smith looked backwards to what caused Britain to be in the shape it was in, and seldom looked forwards to what was likely to happen.

One exception to this lifetime record, was his ‘prediction’ that the American former colonies would be the world’s largest economy, and, if Britain and the colonies had joined together in 1776 into a representative parliament, then located in London, the government would move its location to New York by the late 1880s.

There is an interesting debate about these issues in C. P. Kindleberger, ‘The Historical Background: Adam Smith and the Industrial Revolution’, in Thomas Wilson and Andrew S. Skinner, The Market and the State: essays in Honour of Adam Smith’, Clarendon Press, 1976. Kindleberger debates with R. M. Hartwell on whether Adam Smith knew or should have known about the ‘industrial revolution’. I discuss these issues in my earlier book, Adam Smith’s Lost Legacy, Palgrave Macmillan, 2005.

On the evidence I find that Adam Smith was not aware, nor could be (nobody else was!), about what ‘the industrial revolution’ meant ‘for human possibilities and the human destiny’ in 1776. Karl Marx in the mid-19th century was able to examine and report his view of what ‘the industrial revolution’ meant ‘for human possibilities and the human destiny’in detail from, among other sources, Parliamentary papers, articles, and official reports by the box load.

If Marx is worth reading ‘as an economic historian’ of the events in Western Economies in the critical period of ‘1500-1850’, I would have to say that Marx also had the advantage of reading what many writers in the Scottish Enlightenment, including Adam Smith, had written about this period. Adam Smith centred his entire analysis of the rebirth of the commercial societies of the classical centuries of Greece, Rome, and others that preceded them, on the period after the interregnum centuries from the 5th to the 15th, when commerce (‘at last’) revived (Smith’s 4th Age of Man), and in Britain in particular, became the most advanced historically.

You can read Adam Smith’s rich analysis in his Lectures On Jurisprudence [1762-3] in the Oxford University edition of 1978 (also reproduced in the 1982 Liberty Fund edition, available at an economical price; check Amazon). Much of this is also expressed in Wealth Of Nations too.

Unless you are familiar with Smith’s social-evolutionary approach to the economy, much of his powerful analysis in Wealth Of Nations is diluted.

To this end, I am reading the final proofs (shameless plug) of my new book, Adam Smith: a moral philosopher and his political economy, (July 2008, Palgrave Macmillan) in which I focus upon the re-emergence of the commercial economy. I think you will find that Adam Smith's work in this area is every bit as good (shameless preference) as Karl Marx who wrapped his analysis in his skewed version of Adam Smith’s ‘Ages of Man’ trajectory.

Apart from this, there is a strong case for you book-marking Brad Delong’s weblog here.

Adam Smith on Markets and 'Rules'

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Rik at Liberal Media Elite (‘foul mouthed commentary from America’s heartland’) writes (22 March):

‘Same Shit, Different Day' here:

‘Capitalism, with too much freedom, will drive itself off a cliff. Does it every time. The great capitalist voice, Adam Smith (hell of a guy, hell of a philosophy, hellaciously misunderstood by his proponents today), knew that markets have to have rules. Rules are also known by a less popular name…regulations.’

Comments
Adam Smith was not ‘great capitalist voice’ because he never knew the word nor the phenomenon, though he may have been some sort of a ‘hell of a guy, hell of a philosophy, hellaciously* misunderstood by his proponents today’.

Hellacious = ‘distasteful and repellant’; or (slang): ‘extraordinary or remarkable’, so take your pick.

Adam Smith favoured social arrangements in a regime of justice (otherwise ‘society would crumble into atoms’ (TMS II.ii.3.4: p 86) which is not the same thing as markets being governed by ‘rules’ or ‘regulations’, so much as their being subjected to competition.

He didn’t think that rules and regulations – the law even – should be used to support monopolies, coercion by ordinances, city councils and states at their borders to use tariffs and ‘rules’ to protect domestic merchants and manufacturers from imports and prohibitions’, nor applied in a modern context for businesses and state organizations to be allowed freedom to pollute the environment, to dump toxic waste to poison people, or to employ labour in dangerous processes.

The issue is about which set of ‘rules’ should apply, which is a moral and therefore a political question. It is not a case of a society without rules versus a society governed entirely by rules; it is which sets of 'rules' are supportive of the spread of opulence to the labouring majority and their families.

I do not think Adam Smith regarded mandatory 'foul mouthed' commentary in place of educated discourse was a contribution to civilised learning.

A Graduate of Balliol College, Oxford Quotes Adam Smith, an Earlier Graduate

Martin Meenagh blog (here) writes (21 March):
‘Adam Smith on War’

"Adam Smith used to be at Balliol, which was my college for most of my fifteen years in Oxford, before he left in 1746 to do 'less drinking and more thinking'. In 1776, he more or less invented economics with what Borders, if it had a clue, would no doubt describe as the 'Enlightenment Classic', The Wealth of Nations.

Like many great works, Smith's words contain quotes that challenge any simplistic reading of his ideas. So, for instance, the apostle of markets and commerce warned citizens to be wary of concentrations of capital and of business as an ongoing conspiracy against the public. Smith pointed out that those who profess to trade for the public good are often neither public nor good. You can, on the morning that McDonalds contemplated being offered the sponsorship of British hospitals, read Milton Friedman on Smith's view of business in a semi-mad lecture here.

This Good Friday Morning, recalling the Iraq War, both Glenn Greenwald, the liberal American constitutional lawyer and journalist, and Don Boudreaux at Cafe Hayek, the free-market website, have found another quote from Smith. It details the position of supporters of Imperial Wars. It is very worth thinking about;

In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war."

Comment
Did Adam Smith say: ‘'less drinking and more thinking'? No source is given but I would like confirmation that this was a genuine quote from him.

Martin quotes from Wealth Of Nations via both Glenn Greenwald (whom I quoted in the post below) and Don Boudreaux at Cafe Hayek (always a good read).

Now apart from a few quibbles, this is the third approximately accurate (it’s always better to be approximately right than absolutely wrong!) statement I have found today about Adam Smith’s views and that alone pleases me.

Again it’s a member of the 'younger' generation expressing appropriate comments about Adam Smith in place of the usual problematical confusions with Bernard Mandeville’s Fable of the Bees (1724).

If such more accurate ideas spread, Lost Legacy will have less to do.

A Young College Student Gets it Right

Kelse Moen ‘(a College junior from Sharon, Ma. Due to his strong belief in individual liberty and the free market, he currently serves as attorney general of the Emory College Republicans. He is pursuing a double major in philosophy and political science’) writes an interesting piece, ‘The Iraq Recession’, here:
On The Trail:

‘As many commentators have already realized, our economy is suffering from what could be called ”the Iraq recession.” Though John McCain claims to hold Ronald Reagan as a role model, he could learn more from the eighteenth century economist Adam Smith. That luminary of intellectual conservatism opposed the British Empire for diverting money from the domestic economy and into the government and military. This led him to support the fledgling American Revolution. Yet the old maxim of peace and commerce with all nations has given way to the imperial mercantilism that Smith despised.’

Comment
Another well-written piece (two in one morning!). What a change from my usual task of exposing nonsense about Adam Smith's views.

Be clear, however, I am making no comments on the Republican candidate's alleged need to learn about Adam Smith or whatever. My admiration for Kelse Moen's understanding of Adam Smith's critique of mercantile empires from the diversion of scarce capital away from the domestic economy to protect monopoly trading, which also penalises the domestic consumers from higher prices.

If only more quoters of Adam Smith's writings understood what Wealth Of Nations was mainly about, summairsed in Book IV.

Latest Views on Adam Smith's House

A correspondent writes in The Scotsman (21 March) here:

‘Seize the chance to celebrate an Enlightenment giant

‘The old maxim about the prophet who goes without honour in his own land would seem to apply to Adam Smith, author of The Wealth of Nations, one of the most influential books ever written. It almost beggars belief that Edinburgh council has instructed the sale of his former home, Panmure House, to the highest bidder, for a paltry few hundred thousand pounds, when it should be sparing no effort to ensure the building is kept in the public realm (your report and Letters, 18 March).
Smith, simplistically, is often viewed as the inventor of modern capitalism. In reality, he was a profound humanitarian thinker, a fervent opponent of slavery, a champion of American liberty, a critic of monopolies, a proponent of public education and an author of genius with an international reputation during and beyond his lifetime.

Panmure House is one of the Canongate's few remaining 17th-century mansions, and its association with Smith provides Scotland with a stunning opportunity to celebrate an Enlightenment giant who helped to create our modern world. He appreciated the virtues, as well as the limitations, of the liberal-capitalist system, and his views on the present state of the global economy would be instructive.

The building should be in the ownership of an academic institution or museum trust, restored and used as an international study centre. A public appeal for funding would attract support from both sides of the Atlantic. It should be launched without delay.

The Scottish Government played its part in saving Dumfries House. It could take a leading role in any campaign to redeem this beautiful building in the heart of the world heritage site.’

DAVID J BLACK

Comment
I concur with the general sentiments of David Black . Though being 'kept in the public realm' does not mean that a purchase should require public funds from tax payers.

Adam Smith on Distant Wars

Davissondave writes (20 March) in the Blog: Alien Intelligencer (‘there is no other’) (here) writes ‘An Amusing War’ and quotes

“Glenn Greenwald offers up (here): this still timely observation by Adam Smith -

‘In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war.’

It’s a shame more folks don’t read Smith, especially since his name is taken in vain for so many wrong-headed ideas. Smith also supports government intervention to aid the poor, free public education, minimum wage laws, and abundant taxes on luxury items. If free market libertarians actually read Smith they would be appalled at his liberal, interventionist rhetoric.”

Comment
I am pleased to see a correct assessment of Adam Smith’s views for once. The actual quotation is from Wealth Of Nations, Chapter III, ‘Of Public Debts’ (WN V.iii.37: p 920). It remains essentially plausible today, particularly with the instant 24/7 news cycle we have and the vivid images of conflicts in progress on tv (at least until the bad news arrives).

In Adam Smith’s day, news took weeks to arrive back home (from India it took months; from the American colonies and Canada, weeks). Adam Smith also had a remedy for the public’s role in undertaking ‘revenge’ wars:

“Were the expence of war to be defrayed always by a revenue raised within the year, the taxes from which that extraordinary revenue was drawn would last no longer than the war. The ability of private people to accumulate, though less during the war, would have been greater during the peace than under the system of funding. War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for.” (WN V.iii.50: p 926)

Hyperbole About Adam Smith

‘Alhwang’ (?) writes:

“Adam Smith was a big proponent of free market economics. Some may say that he “invented” capitalism. But who invented Adam Smith? Clearly, saying that Smith invented capitalism would be a naive statement, and nobody invented Adam Smith, but it was the old tale of the Walletin spectre that scared him straight into supporting self interest and competition.”

The above is from ‘Prince Al in A Can’ Blog ('and other embarrassing stories from my childhood') HERE which you should read to follow the context.

Comment
“Some may say that he ‘invented’ capitalism” is fairly common hyperbole. It’s also nonsense.

Nobody ‘invented’ capitalism, or any other social arrangements to secure subsistence. Among the people who contributed to the discovery of how to manage their resource-based survival from way back in what Adam Smith called (Lectures On Jurisprudence) the ‘first age of man’, or ‘hunting’ (he missed out the all-important role of gathering, a large female-driven occupation upon which all depended), there were no moral philosophers around to awake from their deep thinking and to pronounce the solution that worked.

And every other ‘age’ was discovered by trial, error, and experiment, and passed through the generations by multitudes of anonymous individuals.

Adam Smith never knew the phenonemon or the word ‘capitalism’, a word invented in English in 1854 and the roots of which were formed in the ‘age of commerce’ from the 15th century in Western Europe (and which was previously practiced in the classical era of Greece and Rome up to the 5th century) and before that in the middle-east, Asia, and India.

Adam Smith Quotations Out of Context Again

Dave Bath writes on “Adam Smith and the financial crisis” on the Balneus Blog (here)

“In many respects, The Economist is maintaining Adam Smith’s love of free trade and disgust at way managers/directors avoid responsibility, and thus ruin the wealth of worlds.

Such observations are entirely consistent with Adam Smith’s distaste for the managerial classes, who mention An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith comments on these managers and directors:

…being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. … Negligence and profusion, therefore, must prevail, more or less, in the management of the affairs of such a company.”

Comment
A typical exaggeration by misusing a quotation from Wealth Of Nations (from WN V.i.e.18:p741), which referred to an 18th-century chartered Trading Company with a legal monopoly in a distant region, India and all trade east of Cape of Good Hope, and not necessarily to similar joint-stock companies (e.g., Bank of England, Bank of Scotland, Royal Bank of Scotland, canal building companies, insurance companies, etc.,), which did not have monopoly status, as always the critical factor for Adam Smith.

Adam Smith’s disgust for the East India Company, which is expressed unreservedly in his rhetorical style in Book V of Wealth Of Nations, was disgust at the King’s advisors, those who influenced legislatures, and the structures of corporate governance they created and which created the opportunities for fraudulent misbehaviour for which they was famous.

It should be noted that the East India Company was a year away in sailing time and the control of the conduct of the managers by the directors in London was minimal. Today, managers are within seconds only of supervision and checking, a wholly different regime, plus detailed legislation regarding their conduct.

Let's Assume We Had a Bottle Opener...

Nineteen Edinburgh Academic Economists express their “Fears for the future of Adam Smith's house” in this morning's edition of The Scotsman (18 March) (here):

“As economists, we agree with your leader, "Would suit entrepreneur" (12 March), concerning Panmure House, which has been placed for sale by Edinburgh City Council.
This beautiful, historic building is best known as Adam Smith's home in Edinburgh. Panmure House therefore has important associations for anyone interested in the Scottish Enlightenment, in economics and philosophy, or in the history of Edinburgh.

The availability of Panmure House is an excellent opportunity for a new and exciting development of an historically important building near the Scottish Parliament. It would be ideal as the base for a research or policy institute for economics in Scotland. It could also serve as a study centre for Adam Smith and the Scottish Enlightenment.

The sale is being advertised as a "development opportunity", with a possibility of conversion for residential or commercial purposes. If it were converted without account of its historical importance, this would likely prevent its future public use. The possibility of the house being lost to the public is extremely worrying.

(DR) SIMON CLARK; (PROF) MARTIN FRANSMAN; DONALD GEORGE; (DR) OLGA GORBACHEV; (PROF) MAIA GUELL; (DR) RICHARD HOLT; (PROF) ED HOPKINS; (DR) KOHEI KAWAMURA; (DR) TATIANA KORNIENKO; (PROF) JOHN HARDMAN MOORE; (DR) COLIN ROBERTS; (PROF) JOSÉ V. RODRÍGUEZ MORA; DONALD RUTHERFORD; (PROF) JÓZSEF SÁKOVICS (DR) SANTIAGO SÁNCHEZ-PAGÉS; STUART SAYER; (PROF) ANDY SNELL; (DR) STÉPHANE STRAUB; (PROF) JONATHAN THOMAS”

Comment
The attitude of the signatories above contrasts with some of the responses in US Blogs.

One soulless ideologue of the extremist ‘market’ persuasion, driven by his mindless vulgarity on the normally sane Marginal Revolution blog to exclaim that if Panmure House was demolished and a MacDonald’s erected in its place: ‘So be it’!

The conditions of the sale are that the purchaser offers more than £700,000 and more than the second highest bidder. Fair enough.

The building is being sold by the Families and Children department of the City Council (along with many other properties that the Council has acquired over the years). So selling Panmure House to the highest bidder is perfectly sensible in a cash-strapped City Council, which has had its budget frozen at the current level without the usual above-inflation annual increase in its local rates extracted from its citizens.

The issues, implicit in the academics’ letter are that the sale notice is rather sudden and it needs more time for interested parties (like the local universities – of which there are four) to assemble the funds (preferably not from taxpayers) for a serious bid. I understand that the closing date for sealed bids is about three weeks or so away.

One help may be that Panmure House is ‘A listed’ and therefore heavily restricted in what a purchaser can do with it, which may keep certain future users at arm’s length.

I visited Panmure House recently and inspected its potential along the lines suggested by the Edinburgh academic economists, and I concur that it would make an ideal centre for studies related to the Enlightenment and its relevance for today’s economy, business and innovation.

But this is one occasion among many in which the old joke among economists just will not do: ‘Let’s assume we had the money for a viable bid, then this is what we would do…’.

Adam Smith and Tourettes Syndrome

Martin Kelly (‘thoughts from the West of Scotland’) writes a speculative article on whether Adam Smith suffered somewhere on the Tourett syndrome. (here):

‘In search of Historic Tourettists’ (16 March)

“Whether or not this adds any weight to the conclusion may be debatable; but Claudius seems to have shared a personality characteristic, the tendency to take long digressions, with the second possible historic Tourettist - Adam Smith.

Wikipedia's page on Smith notes,

"Contemporary accounts describe Smith as an eccentric but benevolent intellectual, comically absent minded, with peculiar habits of speech and gait and a smile of "inexpressible benignity."[6]"
'Peculiar habits of speech and gait'...hmmm...

In his book on 'The Wealth of Nations', P. J. O' Rourke wrote,
"He talked to himself. His head swayed continually from side to side. When he walked he looked as of he was headed off in all directions...Dining at Dalkeith House, the country seat of the Duke of Buccleuch, Smith began a scathing commentary on some important politician with the politician's closest relative sitting across the table. Smith stopped when he realised this. But then he began talking to himself, saying that the devil may care but it was all true...(w)hen Smith was a government official in Edinburgh he had a ceremonial guard consisting of a porter..wielding a seven foot staff. Each day when Smith arrived the porter would perform a sort of drill team exercise. One day Smith became fascinated by this and, using his bamboo cane in plca e of the staff, matched the porter's every motion, present arms for present arms, about face for about face, parade rest for parade rest. Afterward no one could convince Smith that he'd done anything odd". (pps 172-173)

Why should he think that? He was a sufferer of complex tics who couldn't stop blurting out what he thought and who'd just undergone an echopraxic episode. At that time, for him to walk behind his porter in that manner must have been the most natural thing in the world to do.”

Comment
Having no expertise in Tourette syndrome I cannot give an opinion. If any reader has views on the possibility, please let us all know.

I should say I have always been sceptical of anecdotes about Adam Smith, given that some of them were recorded by social voyeurs like Alexander Carlyle who didn’t take to Smith, especially, it seems because he was welcomed by persons of high-social standing, when Carlyle ( a minister of the church) considered himself highly socially adept, especially with the ladies (I have no information of what the ladies concerned thought of Carlyle)

Adam Smith, Chess Boards and Looking Outside Our Windows

Marshall Manson writes ‘Academics Getting Too Specialised?’ (here) 16 March:

“For the last couple days, I attended a conference that involved a number academics. Listening to the discussion got me thinking: Has academics become too specialized?
Not too long ago, I read the excellent book, How the Scots Invented the Modern World. Among other things, it focuses on Scotland during the Enlightenment, and it reminded me how great thinkers of that era were not specialists. The most famous, of course, is Leonardo da Vinci. He was a painter, inventor, scientist and mathematician. As such, he was aware of the many other great thinkers of his age.
Like Da Vinci, famed father of modern economics, Adam Smith, was an enlightenment era academic. But he famously spent huge amount of his time in the coffee houses of Edinburgh and Glasgow exchanging ideas with the greatest minds of his age from a wide range of disciplines.

Mutli-disciplinary expertise wasn’t limited to Smith and Da Vinci. Surgeons were naturalists. Geologists were moral and natural philosophers. Lawyers were interested in physics and chemistry. (Check out this list for many more examples.)
As such, the great thinkers were constantly challenged by the best ideas from other disciplines. Myopia induced by specialization was impossible.

Over the last few days, I listened to hours of academic presentations. Only once did a speaker suggest looking to other disciplines for guidance. And his remarks, it seemed, were met with skepticism among the assembly.

Why shouldn’t the principles that underly physics or philosophy or psychology impact the theory and practice of communications? It seems to me that it should. And it seems to me that professors of all stripes could benefit from looking beyond their own fields a little more often.’

Comment
Apart from one or two minor quibbles, I completely agree with Marshall Manson’s sentiments. Modern economics is now a sub-branch of mathematics and not much advanced for all that. It is obsessed with predicting the future, where it track record is not good, and pretty useless in dealing with the present, and as for the past, that is a foreign territory. It is not often that they ‘look outside their windows’.

Adam Smith was interested in mathematics, both as a student and as a professor and, later, a gentleman scholar, but he was very clear on its limitations when dealing with people as if they were wooden pieces on a chess board (Moral Sentiments, VI.ii.2.17, p 234), absent a ‘principle of motion of their own’.

Fortunately the tide is turning. Neuroscience is providing some welcome insights into phenomena normally preserved by what is called still, mainstream economics, as is anthropology, sociology, history, evolutionary psychology, primate studies, biology, philosophy, jurisprudence, languages and linguistics, and evolution. Some of these take us back to where the Enlightenment was located and where Adam Smith was in his element.

It is not the mainstream economics is totally useless; it’s just inadequate. Like Adam Smith, I think we should prefer to look outside our windows.

Adam Smith on Self Interest and 'Good' Outcomes for Society

John Reiniers writes(16 March) in Hernando Today in The Tampa Tribune (here)

‘At the time of our founding we were consumed by the Protestant ethic which was both fundamentalist and worldly at the same time. It was the ideal environment to foster the development of capitalism. We were not encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor. We were jump started by a coincidence of history - the publication in 1776 of the Wealth of Nations by Adam Smith - the father of economics and native of Scotland.
Smith introduced the notion of an individual guided by his own self-interest promoting the greater good "of the society more effectively than when he really intends to promote it which was no part of his intention." (The immutable law of unintended consequences.) And the funny thing is that Smith, like our founders, advanced an economic system grounded in "natural law" (more of a self-regulating economy), which was based in part upon the wisdom of God as perceived by man, and ironically best expressed earlier by that practical colonial sage Ben Franklin who observed: "God helps them that help themselves." (But, thought Smith, not to the point of selfishness.)

It would naturally follow for Smith to see government as an impediment to economic success: "Natural law implies a restriction on the functions of government, in the interests of the liberty of the individual." That sure sounds like the mindset of our founders too.’

Comment
This is an interesting argument, but if the American colonies were not ‘encumbered by an economically stagnant feudal "business" model, cluttered with monarchs and lords of the manor’, it is a fact that Britain certainly was so ‘encumbered’, and the commercialization of the declining feudal economy began amidst the ‘feudal business model’ and Britain led the way well into the 19th century.

Adam Smith pointed to the absence of primogeniture and entails in colonial land law (in contrast to Spanish and Portuguese South America), inherited from the British administration that most of its colonies enjoyed, as the decisive influence on the agricultural boom operating in most of them that showed dramatic positive results before and after the 1776-83 rebellion. The fact that primogeniture and entails continued in Britain remained inhibitors of UK economic growth.

‘The immutable law of unintended consequences’ operates both ways. It may be the case that the notion of ‘an individual guided by his own self-interest promoting the greater good of the society more effectively than when he really intends to promote it which was no part of his intention’ can be true in some cases; it is also true that individuals ‘guided by their own self interest’ may not be ‘promoting the greater good’, whatever their intentions.

Adam Smith gives over 50 examples of self interest also having unintended consequences that do not promote the ‘greater good’ of society (in Books I and II of Wealth Of Nations), (not the least of them being the legal institutions of primogeniture and entrails operating widely in the UK!). The connection for self-interest to do ‘good’ for society is not automatic, nor inevitable. Monopolists, protectionists, and purveyors of a host of self-interested behaviours are at least as numerous as those instances that that do ‘good’.

Natural law depends on a system of justice, without which society would ‘crumble into atoms’ (Moral Sentiments), and justice depends on the existence of government. Natural law and liberty were not conceived as being applicable to commercial society only; they were the jurisprudent principles of all societies, and it did not imply ‘a restriction on the functions of government, in the interests of the liberty of the individual’. That notion is a post-Smithian creation.

Adam Smith’s account of the duties of government (Book V, Wealth Of Nations) sets out an extensive agenda for governments in commercial society. His critique of government interventions in Book IV of Wealth Of Nations was directed at some government policies and fallacies, engendered by interested parties, who influenced legislators, and was not a blanket condemnation of government intervention in general.

Many phoney 'free-market' politicians, and those who influence them, favour non-intervention in their indulgences in their self-interest selectively, and they pay large sums to persuade governments to intervene to ‘narrow the competition’, legalise their restrictive practices, and maintain destructive tariffs.

More On Adam Smith and Bernard Mandeville's Differences

Mark Koyama replies to my comments on Bernard Mandeville and Adam Smith’s difference on his blog, Oxonomics, here and I respond as below:

Adam Smith defined wealth as the ‘annual production of the necessaries, the conveniences, and the amusements of life’. Clearly, without the production of the ‘necessaries’ to subsistence level, society would not continue, and this was the experience in the ‘1st Age of Man’ (hunting). After property was introduced, the ‘2nd and 3rd Ages of Man’ (shepherding and farming), ‘conveniences’ were produced (unequally distributed), followed by the 4th Age of Man’ (commerce, ‘industry’, ‘arts’, artifacts, cities). ‘Amusements’ or Luxuries (mainly ‘superior’ decoration, dress, clothes, shelter, appurtenances of living) have been associated with each age.

To say that ‘Smith and Hume' were ‘both defenders of luxury' is not to say much, except in the sense they did not go along with the moral teachings that railed against the facts of human history. A hunter painting his face for his religious devotions was engaged in consuming a ‘luxury’ – it was neither a necessary nor a convenience; a woman carving an animal’s bone for decoration was engaged in luxury production; a priest commanding a temple be built, likewise. As societies became ‘affluent’ – defined as a surplus of annual product over subsistence – the rich and powerful ‘spent’ their affluence on artefacts, tools of war, decoration and splendid buildings, sacrifices to the gods, and succour for the priests who observed of their religions.

In the later years of the first millennium, after the fall of Rome, Adam Smith noted the decline and then collapse of Western Europe’s economy; commerce lapsed, agriculture became ‘pitiful’, and internecine local wars were the norm.

By c. 15th century, commerce was reviving. Smith’s ‘defence’ of luxury should be seen in this context: society advanced from basic ‘necessaries’ through to ‘amusements’. Those purveyors of ‘supercilious superstition’ (mainly of the religious kind) who denounced luxury missed the significance of the spread of opulence, albeit unequal in its distribution.

Adam Smith regarded the main event of the return of commercial society was from the annual growth in annual product and he analysed how growth was likely to raise the annual consumption of the labouring poor by creating ever widening paid employment through the division of labour and specialisation in a non-equilibrium open economy. (Note: this is not the same as the equilibrium dominated models of 20th-century neo-classical economics).

To say that Smith ‘accepted Mandeville's analysis of commercial society’ is somewhat extravagant, to put it politely. I think a close reading of Smith’s Moral Sentiments (TMS IV.ii.4) discussing Mandeville’s ‘pernicious system’ does not support anything like that assertion. Smith discusses Mandeville’s version of human morality; that ‘human virtue’ is ‘the mere offspring of flattery begot upon pride’. I assume I need not rehearse here Smith’s detailed arguments against Mandeville, based on Smith’s theory of moral sentiments, especially his contrast of Mandeville’s denunciation of every passion as ‘wholly vicious’ in ‘any degree and in any direction’ with earlier ‘popular aesthetic doctrines’ which were once similarly popular and which argued that the virtues should face ‘extirpation and annihilation’.

Smith drew attention to Mandeville’s passing popularity, and conceded that ‘it could never have imposed upon so great a number of persons, nor have occasioned so general and alarm among those who are friends of better principles, had it not in some respects bordered upon the truth’ (TMS IV.ii.4.14: p 313). He also noted that the ‘vortices’ of Des Cartes were believed in for a century, though they did not exist, until it was realised that they were impossible and did not have the effects credited to them. Similarly, Mandeville’s ascription of vice to the virtues felt by people was not ‘connected’ to their experience of themselves.

It is commonplace to find almost daily references to Smith supposedly believing in the positive good of ‘greed’ in the economy, often associated with ideas about selfishness attributed to him, but which he never wrote about in his books, and that the actions of business leaders, no matter how selfish their motivations, ends up doing good, blessed by ‘an invisible hand’ to cover the miraculous transformation of 'good' springing from ‘evil’. This is so contrary to his denunciation of the 'merchants and manufactuers' who form monopolies, support protections, generate 'jealousy of trade' against neighbours, promote wars, colonies and other mischief as to be a woonder in itself.

In this libel, the perpetrators are confusing Adam Smith with Mandeville. It stems from the vulgar tutorial presentations of neoclassical economists, who read quickly quotations from Adam Smith, not his books, and who create myths of about his use of the metaphor of ‘an invisible hand’.They conclude with conviction, ‘bingo’!; what they believe in their attributions are monsters of their imaginations.

A Question of Values

Marginal Revolution, a Blog that is sensible, normally, carries a post by Alex Tabarrork, here, comments as below:

“Markets in Everything: Adam Smith's House

The house where Adam Smith lived for many years with his mother and which more recently was used as a home for troubled youth has been put up for sale by the Edinburgh Council for £700,000. Sir Alan Peacock says "It's a disgrace that the council has agreed to dispose of a building as significant as this. It should be saved for the nation."
I think it would be a disgrace if the house went to anyone but the highest bidder. Posted by Alex Tabarrok 13 March.

To which I have commented:

“Alex Tabarrock

I think you may be misunderstanding Sir Alan Peacock - a distinguished classical economist of ripe vintage. He has a letter in The Scotsman this morning clarifying his point:

'I am grateful to you for reporting the sale of Panmure House (12 March). I was quoted correctly but readers may be left with the impression that I was opposed to sale to a private buyer. This is not true, though a case might be made for some restriction on its use as a building of historic interest . As your leader suggests, it would be an excellent opportunity for private initiative, perhaps with a view to promoting genuine interest in and concern for the Enlightenment tradition."

Edinburgh has a long tradition of respecting its ancient architecture, which is why, what we call the New Town, an excellent example of Georgian architecture almost as old as the United States, is a thriving and much sought after part of the City 200 years later, and in the case of the 'Old Town', of even older vintage, with the Royal Mile looking structurally much as it did when Adam Smith was alive. You can still see the Customs House, where Adam Smith worked, much as it was when he worked there from 1788 to 1790.

Panmure House, where Adam Smith lived from 1778 to his death in 1790, and which is about 500 yards down the same street, is an 'A listed' building in the Edinburgh scale of architectural value, and is already legally protected, which severely proscribes what a new owner could do with it.

'Sell to the highest bidder' is an unthinking act of intellectual vandalism. Would you care if a sovereign wealth fund was to buy the house and the land (about a third of an acre) and build an apartment block upon it, or a car park, or a super store? Probably not.

Given the alternatives, including an educational facility for scholarly and visitor interest in Adam Smith's works and, as Professor Peacock suggests, an interest in the Enlightenment, a strong case can and should be made for it being sold for a self-funded private initiative to disseminate Adam Smith’s (and David Hume’s) ideas to a wider audience, to promote scholarship and visitor interest, allied to educational initiatives.

Partial knee-jerk reaction from job-protected academics to impose market solutions on others, which the beneficiaries of the pernicious tenure system in academe shelter behind, is unconvincing.

Robert Skidelsky on Adam Smith

Robert Skidelsky writes in the Cyprus Mail on ‘The moral vulnerability of markets’:

‘Adam Smith wrote that “consumption is the sole end and purpose of production”. But consumption is not an ethical aim. It is not positively good to have five cars rather than one. You need to consume in order to live, and to consume more than you strictly need in order to live well. This is the ethical justification for economic development. From the ethical point of view, consumption is a means to goodness, and the market system is the most efficient engine for lifting people out of poverty: it is doing so at a prodigious rate in China and India.’

Comment
Robert Skidelsky is a distinguished professor emeritus of political economy and best known for his magnificent biographies of John M. Keynes. In this article (here) he makes a moral case against rampant consumption based on envy, greed and (above all) high level borrowing.

However, I think his use of part of a sentence from Wealth Of Nations to support his case is not quite sound, because he uses an argument of Adam Smith (about the need to oppose ‘producer interests’ in favour of consumer interests) as an argument against consumption.

Here is the full sentence within the full paragraph:

‘Consumption is the sole end and purpose of all production; and the interests of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that is would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end of all industry and commerce.’ [WN IV.viii.49: p 660]

A Serious Debate on the Invisible Hand

On a forum for historians of economic thought, I am engaged with several distinguished scholars in a mini-debate on the meaning that Adam Smith attached to the metaphor of 'an invisible hand', which regular readers of Lost Legacy will know exercises my energies and efforts from time-to-time.

I am pleased with this development because it means I am addressing serious people (not the usual media-light commentators who merely repeat what they were taught or read elsewhere in the media). We can assume safely that they are familiar with Adam Smith's work and have read his books. Therefore, if I can influence them to re-read what they already know - and which other readers to read out of interest - perhaps the isolated position that I am in as a defender of Adam Smith's Legacy may become less lonely.

Below is a contribution to a debate from the distinguished Professor Patrick Gunning, Professor of Economics, College of Business Feng Chia University 100 Wenhwa Rd, Taichung Taiwan and my comments. Professor Gunning writes:

‘I would refer to the following passage in WON:

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the wors e for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." Book 4, chapter 2.

In light of the brewer statement (i.e., the butcher, brewer and baker statement -- Book 1, chapter 2), and other statements about self interest in WON, it seems to me that this invisible hand statement can be transferred seamlessly to the domestic economy without compromising Smith's intended meaning. Thus, it seems to me that attacks on the traditional view of Smith's meaning of the invisible hand (e.g., that it is mythology) are misguided and possibly wishful." Pat Gunning

Comment
Professor Gunning quotes part of Adam Smith’s Chapter 2 of Book IV only. I offer below a summary build-up to the famous extract that Professor Gunning selects. It is my case that the extract must be read in the context in which Adam Smith wrote it:

WN: Chapter II on 'an invisible hand': Taking each numbered paragraph up to the famous metaphor:

1 Restraints upon importation - increase monopolies in home market

2 Protected home monopolies encourage protected industries at expense of other
domestic industries - overall the benefits or otherwise not 'evident'.

3 General industry limited by the capital of society - no regulation can
increase society's capital; can only divert it.

4 Individuals seek most advantageous employment - this serves his
interests, but is also advantageous to society.

5 Merchants prefer home trade provided they can obtain 'ordinary, or not a
great deal less', profit, and consequently supports domestic industry.

6 [long paragraph] Merchants prefer 'upon equal of nearly equal
profits' [elsewhere in Book IV Adam Smith shows colonial trade was more
profitable than domestic trade] the 'home' trade to 'foreign' trade of
consumption, and to 'carrying trade' (shipping). Explains in detail why
home trade preferred (explicitly: lower risks of domestic versus foreign
trading); knows local people 'better', knows laws better. Repeats (twice) the condition for preferring domestic trade on 'same or nearly the same
profits, and 'saves himself the risk and trouble of exportation'.

7 Individuals who support domestic industry necessarily direct
industry to produce greatest value.

8 Individuals will seek to increase profits and directs capital to the
industry likely to produce greatest profit.

9 Individuals [for reasons explained earlier] in supporting domestic industry for the 'greatest value' to their own capital, necessarily raise
society's annual value. He does not intend to promote society's interests, only his own. 'Intending' his own 'security' [risk avoidance] he 'intends his own gain' and [same sentence] 'he is in this, as in many other case, led by and invisible hand to promote an end which was no part
of his intention'.

Adam Smith’s supporting argument is deep in the context of the home versus foreign trade, and ‘his security’ (risk avoidance) is even mentioned in the sentence that contains the metaphor of the invisible hand.

The risk-avoidance issue is of major relevance to Adam Smith’s use of the metaphor; the context is not en passant to its use.

The consequence is simple arithmetic: if parts of industry strive to make their profits larger from individual motivations, then it follows that the whole-industry profits are larger. The whole is the sum of its parts (arithmetic law).

Adam Smith’s House is For Sale!

Adam Smith's House is For sale. Panmure House, in which Adam Smith lived from 1788 until his death in 1790 in Edinburgh, is on the market for £700,000.

It is owned by Edinburgh City Council and has been used by its welfare department for many year. The external appearance building is as it was when Adam Smith lived there, but the inside has been heavily changed over the year.

Adam Smith took up residence at Panmure House in 1788 after his appointment as a Scottish Commissioner of Customs where he worked diligently four days a week until a few weeks before he died. It is just off a close in the Royal Mile and about 200 yards from Canongate Church Yard where he is buried.

Further up the Royal Mile High Street between Edinburgh Castle and Holyrood Palace at the bottom, the Customs House where he worked is still standing as a splendid Georgian Building, which since early 19th century, is owned by the City Council and is its political and administrative headquarters. Later this year, the 20-foot statue of Adam Smith is to be erected opposite the old Custom’s House where he worked. This statue has been funded entirely from private subscription under the initiative of the Adam Smith Institute.

Details about the statue are available from www.adamsmith.org or info@adamsmith.org

It was from Panmure House that Adam Smith walked up to the Custom’s House, passing his future grave site, and the hustle and bustle of Edinburgh’s Old Town, not all that much different, except for the obvious fittings of modern life, from when he took his daily walk to work.

I take the same walk when taking visitors, who want to see where Adam Smith lived and worked, as I did recently, as reported on Lost Legacy, with a German journalist who was writing an article on the Scottish moral philosopher and political economist for a German news magazine.

If the money could be raised, Adam Smith’s house could be restored as an educational centre to promote knowledge about Adam Smith’s views (his true legacy) and with his links to the street he lived in, it could attract many visitors. However, there is a requirement, of course, that the restoration could be self-financing.

Here is the announcement in this morning’s Scotsman.
“Adam Smith home left to market forces” By Brian Ferguson

"IT IS the historic building where one of Scotland's greatest thinkers spent his last years.

Adam Smith, the celebrated philosopher and economist, lived with his mother in the house in a close off Edinburgh's Royal Mile for 12 years before his death in 1790.

But it is largely unknown that the Canongate building is where the "father of capitalism" held court in later life – as it is hidden away off the tourist trail and in recent years has been used as a centre for troubled youngsters.

However, campaigners, who have fought for greater recognition of Kirkcaldy-born Smith, have been left dismayed after discovering that the city council has put the building on to the open market.

The council has been repeatedly urged to instigate plans to convert the property, built for the Earl of Panmure in 1691, into an "Adam Smith Museum" or study centre in his honour.

But the council has instead put the building, previously converted into a home for Canongate Boys' Club, up for sale with a £700,000 price-tag and will plough the proceeds into refurbishing a community centre.

Agents handling the sale say they are expecting significant demand for the building, which they believe could be converted to become offices or flats . But the prospect has horrified experts months before Smith's long-awaited statue is due to be unveiled on the Royal Mile.

The veteran campaigner Professor Sir Alan Peacock said: "It's a disgrace that the council has agreed to dispose of a building as significant as this. It should be saved for the nation."

Dr Eamonn Butler, the director of the Adam Smith Institute, said: "We've thought about approaching the council about Panmure House in the past to see what we could do. I doubt we'd be able to bid for it."

Comment
Fact: Adam Smith’s mother, nee Margaret Douglas, lived at Panmure house for 6 years (1778-1784) until she died. His cousin, Janet Douglas, his cousin lived with him too until she died in 1788, as the ‘housekeeper’.