Sunday, April 27, 2008

Adam Smith in Context, Please

John Maxwell in The Jamaica Observer writes ‘
A hungry mob is an angry mob’, 27 April:

According to capitalist theory, commodity markets and all other free-market institutions are essential components of the equitable management of world trade, balancing supply and demand and performing a function so disinterested that it can almost be considered a public service.

'The father of capitalist theory, Adam Smith, thought otherwise. While he extolled the essential fairness of the 'invisible hand' he decried the 'inherent greed and self-interest to which most businessmen were prone'
. According to Adam Smith:

"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." (The Wealth of Nations: Vol 1, Book 1, Chap 10).”

Comment
John Maxwell’s lively articles liberally comes up with quotes by and assertions about Adam Smith, and I have commented occasionally on Lost Legacy over the months past.

In the above article he runs together assertions about ‘Capitalist theory’ (whose version?) and the status of Adam Smith (its ‘Father’?) and a quotation that is not quite it seems, though widely quoted as such.

First, the world, and certainly not anything experienced this century near the Caribbean, does not conform to a theory of ‘harmonious’ or ‘free trade’ capitalism, as outlined by anybody since ‘capitalism’ became a known phenomenon – plus since it became a word in English – around the 1850s.

Moreover, the ‘theory’ that capitalism consists of the ‘essential components of the equitable management of world trade, balancing supply and demand and performing a function so disinterested that it can almost be considered a public service’ is pure hyperbole.

True, those theorists promoting partial and, later, general, equilibrium, have found in mathematics a ‘proof’ that this could happen in the abstract, is a long way from establishing it in real world practice.

The place of Adam Smith, as ‘the father of capitalist theory’ is at odds with theories created after 1870 (Smith died in 1790). Adam Smith did not write about, did not know the word ‘capitalism’ (first used in English in 1854 by William Makepeace Thackeray in his novel, The Newcomes), and did know of the phenomenon of modern capitalism. Hence, he had no views upon it.

Smith wrote about commercial society as it operated in Britain from the 15th to the mid-18th century and not about ‘capitalist’ economies. The very quotation used by John Maxwell demonstrates this neatly:

"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." (The Wealth of Nations: Vol 1, Book 1, Chap 10).

Readers might find it more useful to read the whole of Chapter X and not just the quotation (it’s very readable). It is in two parts on the subjects of the ‘Inequalities from the Nature of the Employments themselves’ and the ‘Inequalities occasioned by the Policy of Europe’. In these parts, Adam Smith discusses, not a free market, but the extent to which markets are distorted in the determination of wage rates in actual societies. He notes:

But the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much great importance.’ (WN I.x.c.1: p 135)

From here he discusses the ‘exclusive privileges of corporations’ as ‘the principal means’ of ‘restraining the competition in some employments to a smaller number than might otherwise be disposed to enter them’. Now, by ‘corporations’ he did not mean what we call Corporations today; he was talking of town governments drawn from the ‘incorporated trades’, which were bodies of ‘tradesmen’ (artisans) and shopkeepers (merchants of various kinds).

These ‘incorporated trades’ had gained monopoly privileges from governments after Elizabeth I in the 16th century that allowed them to decide on the number of apprentices their members were allowed (2), the length of their induction (up to 7 years), the exact trade secrets they were allowed to learn, and decide how they were to govern themselves. Broadly, these arrangements had the effect of ‘restricting competition’ to raise prices. Because each ‘trade’ had its own rules, and each abided by the monopolies accorded to other ‘trades’; collectively they had a stranglehold over the towns’ economic activity.

Adam Smith points out:

The government of towns corporate was altogether in the hands of traders and artificers; and it was in the manifest interest of every particular class of them, to prevent the market from being overstocked, as they commonly express it, with their own particular species of industry; which is in reality to keep it always under-stocked.’ (WN I.x.c.18: p 141)

It is the ‘clamour and sophistry of merchants and manufacturers’ that easily persuades ‘them that the private interest of a part, and a subordinate part of the society, is the general interest of the whole.’ (Ibid: p 144)

A paragraph later (p 145), Adam Smith declares his assessment of the outcome when people of the ‘same trade meet together’. He is specifically criticising the consequences of mercantile political economy dominated by Guilds, Incorporated Trades, and petty traders. He is not talking about large-scale multinational modern Corporations (which no doubt have their own deficiencies).
Adam Smith’s remedy was more, not less, competition, and fewer not more ‘regulations’.

John Maxwell also writes: ‘While he extolled the essential fairness of the 'invisible hand' he decried the inherent greed and self-interest to which most businessmen were prone.’

I know of nowhere in any of his books that Adam Smith ‘extolled the essential fairness of the 'invisible hand'. In fact, I don’t know what that sentence means.

Adam Smith never wrote about ‘invisible hands’ in connection with markets (Book I and II); his sole reference to ‘an invisible hand’ is in Book IV: p 456). H

He certainly ‘extolled’ the virtues and fairness of markets; it was the lack of them that attracted his ire. His solution was competition!

His critique of ‘greed’ (induced, not ‘inherent’!) of the ‘private interest’ of ‘merchants and manufacturers’, fuelled by their ‘clamour and sophistry’ was directed at them being given by legislators monopolistic powers to reduce competition. The remedy was for legislators to refrain from doing so.
John Maxwell, clear writer that he is, happens also on this evidence to be somewhat confused about the ideas of Adam Smith and the notions of modern economists who ascribe to him views he never held.

Indeed, the vary chapter 10, quoted from by John Maxwell is one of over 50 instances in Books I and II in Wealth Of Nations where he renounces the notion attributed to him in connection with the single use of the metaphor of ‘an invisible hand’ where he exposes the shallowness of the idea that he believed that ‘an invisible hand’ guides individuals to seek their own self interested outcomes and that this necessarily delivered the aggregated self interests of society.

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