A Tall Sunday Story of an Invisible Hand

Dialektika (‘the working man in the world unit’)

Adam Smith and the invisible hand by Helen Joyce.

Joyce begins by slightly misleading her readers, by cutting into the famous paragraph 9 that mentions the metaphor of the invisible hand (WN IV.ii.9: 455-6).

By cutting out the crucial information that Adam Smith discusses not just the general individual in society but those particular individuals who employ ‘whatever capital [they] command’ (WN IV.ii.4: 454), namely merchant traders. He is dealing with a particular case of owners of capital who contemplate where to invest it and choose between engaging in the ‘foreign trade of consumption’, particularly, though not exclusively, in British colonies in North America or India, or investing it locally.

The decision centres on which destination is ‘most advantageous’, which boils down to which is most profitable and least risky? Both are profitable, but one (foreign trade) is more profitable and more risky than the other.

When he invests locally his ‘capital is never so long out of his sight’ and in the colonial trade it may be away from him for months, and subject to the vagaries of the weather at sea, risks of piracy, seizure during wars, dishonest handling in foreign ports, malfeasance when under the control of distant merchants, of whom he knows less than those close by him, the vagaries of foreign justice, and the fortunes of distant consumers.

Not considering the context of which Smith was addressing is tantamount to drawing in the minds of readers of the stripped down quotation a completely misleading impression that Smith is talking as a general rule of trade. He wasn’t! It isn't even mentioned during his long discussiosn of markets in Books I and II of Wealth Of Nations!

Smith is discussing the risk aversion of merchants to investing in trade abroad and necessarily investing locally. The consequence is for Joyce to downplay those parts of the quotation from paragraph 9 that make it clear of what he speaks.

The individual merchant ‘intends only his own security’ and it is this consideration, plus his desire to make profits, ‘provided he can thereby obtain he ordinary, or not a great deal less than the ordinary profits of stock’ (WN IV.ii.5: 454), which determine inexorably, by the arithmetic rule that the whole is the sum of its parts, that domestic products thereby ‘may be of the greatest value’, and certainly greater than they would be if merchants were risk neutral.

This conclusion is sufficiently explained by Smith and readers who understand its construction would see that truth immediately. His readers were educated and literate, but not necessarily all to the same standard, and to cap his presentation he drew on his knowledge of literature, both contemporary and classical, where the metaphor of ‘an invisible hand’, which was widely used and recognised in the 18th century, of ‘an invisible hand’.

The metaphor represents, as metaphors are supposed to, and as Smith taught in his lectures on Rhetoric (see: Lectures on Rhetoric and Belles Lettres,[1763] 1983), the object under discussion, namely the behaviour of risk averse merchants. It was not a ‘theory’, ‘concept’, or ‘paradigm’, nor the greatest idea of great significance. It was not a reference to God, or some divine intervention, which Joyce thought that Smith discovered because he ‘was profoundly religious, and saw the “invisible hand” as the mechanism by which a benevolent God administered a universe in which human happiness was maximised.’ Her conclusion is an assertion for which she has limited evidence.

Smith’s mother was ‘profoundly religious’ but there is no evidence that he was. Indeed, he had abandoned Oxford University to avoid continuing to become a priest in the Church of England and to preach in the Episcopalian Church in Scotland.

The metaphor of the invisible hand is just a metaphor. Nothing more.

Shakespeare used the invisible hand in Macbeth (the ‘Scottish play’), as did Daniel Defoe in Moll Flanders and Colonel Jack, and a score of other authors in books on the shelves of most educated people in the 18th century.

Helen Joyce makes several other wild assertions in her article (HERE). If I have time I shall return to them, but for now I have a conference to attend.

The 35th History of Economics Society Conference, Toronto, 2

From the interesting reminiscences of Geoff Harcourt (a veritable tour de force), I caught the tail end of the paper by Francis Peddle on ‘Hegel’s Concept of Poverty and Scottish Philosophy’. This was not the last reference to Hegel and Adam Smith’s (and Adam Ferguson and Dugald Stewart’s) influence on him. Hegel came up in several conversations during the rest of the day and, as I have little acquaintance with Hegel, it’s all new to me.

Duncan K. Foley took the plenary session. He spoke from, or rather read from, a two-sided pile of typed pages, sometimes at breakneck speed on ‘The History of Economic Thought in the Education of Duncan Foley’. What I caught seemed interesting; unfortunately, much was lost in a rushed mumble, which the sound system did not do much to help in the vast auditorium. By reading from a paper, necessarily looking down at it (Duncan is an American-tall man), he did not help his delivery. I shall await its publication and make a more informed judgement.

The next session that I attended was ‘18th-century Thought’ and this was a gold-dust session for me. Three excellent presentations; three interesting topics; and three stimulating speakers – they made my day.

Loic Charles reported on his work with Christine Théré in Quesnay’s archives and their discovery of the close collaboration of Mirabeau in the ‘produit net’, showing how Mirabeau convinced Quesnay to re-define its meaning. The archives of their handwritten exchanges show this clearly. Incidentally, the French pronunciation (Charles is French) of Quesnay is ‘Kenay’, silent ‘s’; I never knew that, though the discussants from the floor clearly did.

Jeffrey Young (St Lawrence University) ran through his paper on the post-war literature on Malthusian ideas (Limits to Growth, etc.,) and illustrated his case with clear diagrams showing the ‘ecological’ version of Malthus and how they must be re-drawn to correspond to both Malthus’ original ideas and to analysis of he actual constraints on growth. I have seen a similarly constructed diagram by Gavin Reid, showing Adam Smith’s ‘Four Ages of Man’ (Hunting, Shepherding, Agriculture, and Commerce).

Young concluded that the real constraint on growth is not the physical shortage of resources so much as institutional deficiencies (population behaviours; wrong-headed policies). Malthusian predictions have not materialised, and apart from local problems, human prospects are much better than is propagated by ‘limits-to-growth’ type literature.

Young called his approach in the paper as ‘thin history'; for something ostensibly ‘thin’, he was remarkably productive in making his case. David Levy, his discussant was excellent – he spoke to the listeners in the room, and not as is often the case, he did not engage in a barely audible conversation with the speaker a few feet from him; he spoke to the seminar.

In a spirited contribution, Levy, spoke of his case that there are two separate claims to the ideas of Malthus: one is straight Malthusian set of ideas based on what he wrote; the other is a ‘Malthus’ invented by modern literature. I felt the same can be said of Adam Smith.

Benjamin Mitra Kahn (City University) spoke to 'Defining Economic Growth in the 18th century'. His exposition was excellent; his content well arranged, and his purpose fulfilled in showing how ideas about national income accounting slowly emerged as nation states wrestled with what seems to be a problem of classification of stocks and flows, but which was in fact a highly practical search for a clear method of selecting flows for taxation to finance wars.

I commented, briefly, that Adam Smith's distinction between 'productive' and 'unproductive labour' had nothing to do with national accounting, though incorrectly ascribed as that later. These had much to do with Smith's dynamics of growth: what added to growth (circulating capital) and which didn't (prodigality in consumption). It wasn't a divide into manufacturing and services, as is commonly claimed; providers of services for unproductive consumption, were profit-seeking suppliers who did replace their outlays plus a profit, some of which was re-invested in replacing labour and materoal costs and therefore were productive.

I attended part of the session ‘Money in Hume, Law and Cantillon’, in which James Ahiakpor spoke on the ‘Search for a Consistent Interpretation’ of ‘Hume on money’. Again, it is a case of being ‘interpreted’ by
20th-century theorists (Fisher, Taussig, Viner, et al) rather than his (Humes')contributions, ‘Of Money’, ‘Of Interest’ and ‘Of the Balance of Trade’, taken together. Ahiakpor made a competent case, supported by on-screen paragraphs from the different sources.

Here I took a break, and conversed in the coffee room with some participants, and bought a couple of books. The ‘In Memorium’ plenary session for ‘Bob’ Coats was well attended and had a video link to Warren Samuels, whom I had hoped to speak to about his 2007 paper on the modern treatment of the invisible hand. Clearly, he was convalescing and not in attendance. The speeches about Bob Coats (of whom I knew little, other than couple of his pieces I have read on 19th-century social conditions) were moving tributes to the man, his wife and partner, Sonia, and their work.

Lastly, I went to the reception for the outgoing editor of the excellent Journal of the History of Economic Thought, Steven Medema. After ten years, he hands over to the next editor. He has also organised the speakers for the Edinburgh Conference of HET in September, at which I am presenting a paper.

Small change: I was proposing to speak on ‘Adam Smith and the Labour Theory of Value’, basically showing he has been wrongly (dis)credited with a LTV. Instead, I have been asked to give my latest version of my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ and I am very pleased to do so. I shall present the LTV paper (now in final draft) next year at an early opportunity.

The ‘invisible hand’ is a more pressing issue than LTV among the profession and given the critical audience of the HET conference – small numbers, longer sessions, more discussion and more time for critical appraisal, I am pleased, apprehensive, but not complacent, at the challenge of a critical test before my peers for a theme I have been explicating and defending since 2005 on Lost Legacy.

The final paper goes into the conference secretariat next week. It is a clear case of presenting the original ‘S’ rather than the modern “S” (acknowledgements to David Levy).

... Sunday dawns, and I am ready for delivering my paper: ‘Adam Smith on Bargaining’ after lunch, and after a morning session on ‘Plato, Aristotle (and Marx?)’, plus a panel discussion on ‘historians and the history of social science’.

History of Economics Society 35th Annual Meeting 1

Toronto, Canada. I've been here couple of times, changing planes, but this is my first visit to the city on the ground. I have been here in imagination though. My grandfather was in Toronto from the coal fields of Killwinning in Ayr, Scotland from 1910 to the first world war when he returned home. He told me he came home to join the army but they sent him back down the pits to dig coal. Just as well, otherwise my mother would not have been born in 1916, nor me in 1940.

Riding around in taxis, I wodnered how much had changed. From the look of the buildings, the main roads, bridges and railways, it must have changed a great deal. My grandparents would never have recognised anything. They had met and married in Toronto, she from Moray, 'in service' to a Lord and family and he, a cobalt miner from somewhere in Canada.

York University, the conference venue, is large by Scottish, though not by Shanghai standards. Is also new, modern and neat. We're in the 'Schulich Scool of Business' building.

This afternoon (Friday) it was registration, an impressively efficient affair. I wandered off for a coffee with Geoff Harcourt (Cambridge) whom I have not met before but knew him from his role in the 'capital controversy' of the 60' and 70's (I still have a copy of his book). This was a debate between neoclassical economists in Cambridge, Mass. and Cambridge, England. He is a most interesting conversationalist, typical of what I missed from not going to Cambridge. We knew various people in common, but he knew many more, mostly 'big names' in the discipline, and his accounts of them and their work fascinated me. Geoff is a intellectual biorapher, particularly of the Joan Robinson, whom I met once when she was awarded a Honorary Degree at Brunel University, where I was a junior lecturer in the Economics Dept headed by John Vaizey. I also read her book, Imperfect Competition, which struck me as brilliant, and also because of a small point: it was the first economics text that I had read that had diagrams that included red lines as well as standard black. By the 1970s multi-coloured illustrations were fairly common and no longer limited to plain text and often impenetratable graphs. She was always readable.

At the evening supper I slipped away early, preferring to stick close to UK time zone habits as my stay here is short and it's a busy week to come with the unveiling arrangements of Adam Smith's statue in Edinburgh on 4 July.

Lost Legacy Loses Contact!

Apologies but my computer crashed on Tuesday (after a house guest used it for his emailsy). This cut me off on Wednesday. On Thursday I was travelling to the History of Economics Society Conference in Toronto and my office is wroking to undo the damage (in future I shall decline my hospitality being extended to my pc).

I am only able to post via my laptop in the hotel in Toronto.

However, I shall report on the HES Conference each day.

Sorry for this.

Gavin

More on Samuel Bowles' Misreading of Adam Smith

The problem with citing Adam Smith in support of an interpretation of a modern designed experiment in behavioural economics is that the understanding of modern economists, or indeed their familiarity with Adam Smith’s writings, leaves a great deal to be desired. If their understanding of Adam Smith’s theories is not just limited, but what they do know about them, usually from isolated third-hand quotations, is completely incorrect or at least lacking correctness in key places.

I have already referred critically to the article in the 20 June issue of Scientist by Samuel Bowles (for the Sante Fe Institute) and another reports of the article in Reasononline (free minds and free markets) (HERE:)

“Does the Invisible Hand Need a Helping Hand?”
(‘A behavioral economist explores the interaction of moral sentiments and self-interest) by Ronald Bailey, 24 June, asserts:

“In the June 20 issue of Science, Samuel Bowles, director of the Behavioral Sciences Program at the Santa Fe Institute, looks at how market interactions can fail to optimize the rewards of participants—e.g., the micromanager who gets less than he wants from his employees. For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments." His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense. This natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways.”

“Bowles, with some evident regret, observes, "Before the advent of economics in the 18th century, it was more common to appeal to civic virtues." Bowles does recognize that such appeals "are hardly adequate to avoid market failures." How to resolve these market failures was the subject of Smith's second great book, The Wealth of Nations (1776), where he explained: "By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it."

Comment
I pick on these paragraphs because they contain serious errors of attribution to Adam Smith, easily corrected by reading Moral Sentiments and Wealth Of Nations.

“For Bowles, the key is that policies designed for self-interested citizens may undermine "the moral sentiments."

His citation of the "moral sentiments" obviously references Adam Smith's The Theory of Moral Sentiments (1759), in which Smith argued that people have an innate moral sense.”

Adam Smith did not assert that “people have an innate moral sense”, which is a fairly common error, though unsustainable if Moral Sentiments is consulted. The idea of an ‘innate moral sense’ properly should be attributed to Frances Hutcheson, Professor of Moral Philosophy at Glasgow University, and Adam Smith’s tutor from 1737-40. Not for the only time did Smith disagree with his old and much respected tutor, whom he described as ‘never to be forgotten’.

Smith excludes the innateness of moral sense by an imaginary example:

“Were it possible that a human creature could grow up to manhood in some solitary place, without any communication with his own species, he could no more think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind, than of the beauty or deformity of his own face. All these are objects which he cannot easily see, which naturally he does not look at, and with regard to which he is provided with no mirror which can present them to his view. Bring him into society, and he is immediately provided with the mirror which he wanted before. It is placed in the countenance and behaviour of those he lives with, which always mark when they enter into, and when they disapprove of his sentiments; and it is here that he first views the propriety and impropriety of his own passions, the beauty and deformity of his own mind. To a man who from his birth was a stranger to society, the objects of his passions, the external bodies which either pleased or hurt him, would occupy his whole attention. The passions themselves, the desires or aversions, the joys or sorrows, which those objects excited, though of all things the most immediately present to him, could scarce ever be the objects of his thoughts. The idea of them could never interest him so much as to call upon his attentive consideration. The consideration of his joy could in him excite no new joy, nor that of his sorrow any new sorrow, though the consideration of the causes of those passions might often excite both. Bring him into society, and all his own passions will immediately become the causes of new passions. He will observe that mankind approve of some of them, and are disgusted by others. He will be elevated in the one case, and cast down in the other; his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.” (TMS III.1.3: p 110)

Smith’s metaphor for the effect of society on the individual was as a ‘mirror’ by which people learn how to behave and how to distinguish between propriety and impropriety. They are not born with these attributes; they have no inbuilt set of values; these emerge, slowly and gradually, through contact with others, first with adults and then with other children (in the ‘great school of self command’). It is from these that their ‘impartial spectator’ emerges as the judge of their moral conduct.

Their “natural feeling of conscience and sympathy enables human beings to live and work together in mutually beneficial ways”, but only because they ‘live and work together’, and not because they are born to do so without the essential contact with others. Otherwise, children would ‘know’ how to express their moral senses without the need for the emotional chastisement of the others with whom they interact as they grow up and mature.

At the end of the article there is a clear recognition of Adam Smith’s theories of the location of the sources of moral sentiments: “In other words, as people gain more experience with markets, morals and material incentives pull together.” Yes, it is the gaining of experience from interaction with others in markets that teaches people the role of ‘markets, morals and material incentives’.

The second quotation, moving on from Moral Sentiments to Wealth Of Nations only carries weight in Samuel Bowles’ argument – at least as expressed by Ronald Bailey – because it is torn out of context:

"By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it." (WN IV.ii.9: p 456)

This is, of course, from the infamous (considering what has been done with it since the mid-20th century by modern economists) quotation from the paragraph that includes his lonely use of the metaphor of ‘an invisible hand’.

It is not true to suggest that this statement was about “how to resolve these market failures” which “was the subject of Smith's” Wealth Of Nations.

Regular readers will know that the paragraph in question, from Book IV and not from Books I, II, III or V, refers to the specific consequence of risk avoidance among merchants leading some, but by no means not all of them, to prefer to invest their scarce capitals locally rather than take the higher risks of piracy, disasters at sea, malfeasance of those strangers they trade with in distant foreign countries and colonies, and the longer delays from returning their capital and profits.

The inescapable consequence, by the laws of arithmetic, that the more capital that is invested locally (foregoing higher profits), the higher will be domestic capital formation, and the higher the ‘annual output of the necessaries, conveniences, and amusements of life’, summarized as the whole is the sum of its parts – increase the parts and the larger will be the whole.

The merchant who is risk averse ‘intends only his own security’ and thereby promotes the interest of the domestic economy, for the larger the local ‘industry’, the larger the local employment (Smith considered the two variables to be intimately linked), and the quicker the ‘spread of opulence’ especially ton the poorer labours and their families. It had nothing to do with ‘market failure’.

That behavioural economics is presented in this manner by Samuel Bowles and others, the greater is the pity because their incorrect interpretation of the very positive research results of their experiments compromises the real lessons that could be gleaned from them if modern economists were more familiar with Adam Smith’s true legacy.

Self Interest is Other-Centred in Bargaining

I was sceptical about the title of a long post in ODE (‘the online community for intelligent optimists’) (HERE) this morning ( 23 June):

“The gospel according to Adam Smith
Is doing good compatible with making money? It is if you practise spiritual capitalism.” by Carleen Hawn (a business journalist based in San Francisco):

“Spiritual capitalism doesn’t mean prayer sessions on the shop floor and guided meditations in the boardroom. At least it doesn’t have to. What it does mean is the success of an enterprise is measured by values like “integrity” and “commitment” as much as by targets like “efficiency” and “profitability.” It’s based on the recognition that every businessperson—whether you’re the CEO of a major multinational or the head of your own small firm—is in the service industry, and the services rendered must benefit not just yourself and your shareholders, but the planet and other people as well. The first commandment of the growing spiritual-capitalism movement is: Taking care of business means taking care of others.
The spiritual father of spiritual capitalism is not Mahatma Gandhi or the Dalai Lama. It’s Adam Smith. After all, there’s a reason why his most famous work is called The Wealth of Nations and not The Wealth of Individuals. Smith, the 18th-century philosopher, argued that the free market—in which “every man, so long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with any other man”—is the best way to build wealth. He also argued that the benefits of the free market should accrue not just to individuals but to society as a whole.”

“Business and the Buddha author Lloyd Field argues that the traditional profit-for-profit’s-sake model of doing business isn’t just flawed but “based on greed, hatred and delusion.” Writes Field, “I do not believe this is what Adam Smith intended. The societal ills that result from this … stand in stark contrast to [Smith’s] goals.”

Comment
The article which follows (HERE) makes its case for ‘spiritual capitalism’ with a series of cases of business leaders who transformed the way they do business for associated targets in addition to the making of profits, mostly in people skills, people understanding, green issues and listening to what customers say.

The main cases are in finance businesses (Allianz, for expale) where they deal with people who have problems, or concerns of some kind. But there is also a case about a café business.

For Adam Smith, the ‘greed is good’ view of life (summarized in the 20th-century by Geco of ‘Wall Street’ and in the 18th century by Bernard Mandeville in the Fable of the Bees) are anathema to his philosophy and his political economy. This is not my conclusion drawn from a long philosophical discussion based on tenuous interpretations of obscure footnotes. It is a central concept in Wealth Of Nations and Moral Sentiments.

Take the famous quotation of the nature of the transactions you undertake for your dinner:

“It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts. Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.*42 Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilized society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely*43 independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (WN I.ii.2: 25-7)

Most read this passage as if it is a description of being self-interested in self. It is quite the opposite. Adam Smith makes it clear that he is reminding readers that when they want something from somebody else they have to take account of the other person’s self interest and not to take account only of their own interests:

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.”

Note the words: ‘interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.’ Could it be clearer? But more – there are two people involved in every transaction: the buyer and the seller and each are enjoined to follow the same mandate: interest the other person by understanding their advantages in completing the transaction.

How can they do this? By offering them a bargain:

‘Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.’

It’s not a one-way deal: ‘give me what I want!’ That won’t motivate somebody to transact with you. That’s not a bargain; it’s a one way street. You have to offer them something too: ‘Give me that which I want, and you shall have this which you want’. The bargain is a conditional proposition: ‘If you do this for me, Then I shall do that for you’.

Mostly, people quote the last sentence without the prologue:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Worse! They quote the sentence without reading it. Address yourself to their self love, not your own. Telling them of your ‘own necessities’ is not persuasive. You have to tell them of the ‘advantages’ of the transaction to them. Your conditional offer tells them what they will get in return: ‘you shall have this which you want’. You must be other-centred in the bargain.

In summary, Adam Smith’s moral philosophy asserts that our own self-interest is best served by serving the self interests of others. That is what bargaining means for the exchange transactions of people in commercial societies. It is the integrity of bargaining that is compromised by monopoly businesses which eliminate or restrict competition, by coercive manipulation of supplies of goods, labour and capital, and political, religious, or ideological interventions in the freedoms of law abiding people to transact with those who are prepared to transact with them without harming others.

This is a long way from the ‘greed is good’ school of business. Smith did not call this ‘spiritual capitalism’ – he never knew the word capitalism, as it was first used in English in 1854, long after he had died in 1790 – nor was it a ‘gospel’ or anything ‘spiritual'. It was a plain description of how transactions were managed in a commercial society, free of the policies of mercantile political economy, the then dominant form of interference in the economy he knew well.

Carleen Hawn reports, via MindBodyGreen (‘share and discover better, healthier, and green living’) (HERE)on a central pillar of Adam Smith’s political economy written 232 years ago in Wealth Of Nations. That is a whole lot better than how most of the economics profession report of the goals of business, consumers, and governments of today.

Adam Smith on Poverty

A post by Don Arthur in the Australian Blog, Club Troppo, (HERE) which has been quoted on Lost Legacy in the past when I referred to articles by Nicholas Gruen, opens an interesting and important discussion on poverty in societies and Adam Smith’s expressed view on the issue. I only quote some parts of it, and I have deleted several excellent references and discussions of recent work by academics on related matters. Check the link and read them for yourself:

“What if Adam Smith was right about poverty?
Don Arthur, 22 June 22

"Well-being isn’t just about our relationship with things, it’s also about our relationships with each other. Poverty hurts, not just because it can leave you feeling hungry, cold and sick, but because it can also leave you feeling ignored, excluded and ashamed. In The Theory of Moral Sentiments Adam Smith argued that all of us want others to pay attention to us and treat us with respect. And "it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty."

Recent research confirms Smith’s intuitions — social pain is every bit as aversive as physical pain. And Smith’s thoughts about the way people use material goods to achieve social goals are even more compelling in the light of Gary Becker’s theory of household production. Becker argues that all human beings have stable preferences that relate to fundamental aspects of life such as "health, prestige, sensual pleasure, benevolence, or envy" rather than to specific goods and services. If Becker is right, material goods are often only a means to social ends.

So if Smith is right then what should we do about involuntary poverty? Is it enough to provide state subsidised goods such as housing and healthcare and to dole out money for necessities?

Adam Smith — Poverty as social exclusion
According to Adam Smith, human beings are by nature social creatures. In The Theory of Moral Sentiments, he wrote:

'Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard. The reason poverty causes pain is not just because it can leave people feeling hungry, cold and sick, but because it is associated with unfavourable regard.'

As he explains:

'The poor man … is ashamed of his poverty. He feels that it either places him out of the sight of mankind, or, that if they take any notice of him, they have, however, scarce any fellow–feeling with the misery and distress which he suffers. He is mortified upon both accounts; for though to be overlooked, and to be disapproved of, are things entirely different, yet as obscurity covers us from the daylight of honour and approbation, to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire, of human nature. The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel.'

For Smith, a person’s possessions function as signals of underlying personal characteristics — characteristics that others regard either favourably or unfavourably. In the Wealth of Nations he wrote:

'A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct.'

As Mark Thoma notes, Adam Smith thought poverty was about much more than physical deprivation. The labourer’s linen shirt has value because it can be used to influence other people’s opinions. The labourer is using the shirt as a raw material in a production process — a process that affects other people’s mental states, changes their behaviour and, ultimately, improves the psychological well being of the wearer.

The ‘good’ that is being consumed here is not the shirt — it is the observer’s opinion. While it’s true that the observer’s opinion only affects the labourer’s well being via behavioural signaling, this is true of many consumer goods.

Social pain
Smith argued that human beings are hard-wired to care about each other’s opinions. As he put it, nature taught people to feel pleasure in the favourable regard of others, and pain in their unfavourable regard.

Gary Becker and household production
Adam Smith’s labourer valued his linen shirt, not just because it protected him from the sun and wind, but because it protected him from the unfavourable judgments of those he depended on. Smith argued that all human beings want others to notice and approve of them. More recently, economist Gary Becker and Robert Michael suggested that all human beings might have the same basic preferences. It seems likely that some of these preferences relate to social approval:

'In the standard theory [of choice] all consumers behave similarly in the sense that they all maximize the same thing — utility or satisfaction. It is only a further extension then to argue that they all derive that utility from the same "basic pleasures".

The social utility of wealth
According to Smith, the rich get far more attention and respect than the poor — even when they’ve done nothing to merit it. "In equal degrees of merit", he wrote, "there is scarce any man who does not respect more the rich and the great, than the poor and the humble." Material consumption acts a signal of underlying characteristics — characteristics that are able to provoke deference, approval and affection.
What if Adam Smith was right?

For Adam Smith poverty meant having visibly less than others. But it’s not obvious that Smith’s problem of poverty could be solved simply by handing out food, housing and health care to those at the bottom of the income distribution. Smith argued that people have social as well as physical needs. In our society, working-age adults meet many of these needs through paid employment. Work is not just a source of income, it can also be a source of status, belonging and approval from others.
This view of well-being helps explain why income redistribution on its own will never be enough to guarantee that the needs of the least advantaged are met. When income support payments are linked to tests of employability (as with disability payments) or job search effort (as with unemployment payments), eligibility for the payments is itself a signal (whether we like it or not).

If we’re committed to constantly improving well-being of the least advantaged, what policies should we support?”

Comment
I may come back to this later as I am about to leave for my wife’s birthday party and it would not be nice to delay proceedings at our daughter's house. Meanwhile read the whole posting by Don Arthur; it is an excellent use of your time.

Buy Defence Goods From Allies When they are Better Products

Family Security Matters (engaging American families in our Nation’s security) HERE:

"Exclusive: Tanker Bid Show Weakness of US Policy" by William R Hawkins:

“Those who want to base national security on academic economic theories should be aware that Adam Smith carved out an exception for defense industries. On the topic of the Navigation Acts, the centerpiece of British mercantile policy, Smith wrote in The Wealth of Nations that the "defense of Great Britain depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country." He approved of paying bounties for the production of naval stores in the American colonies so the empire would be less dependent on the importation of strategic goods from foreign sources. Smith believed, "It is of importance that the kingdom depends as little as possible upon its neighbors for the manufactures necessary for its defense."

Comment
This is extracted on a piece in which the author is opposed to the buying of aircraft designs from Europe rather than from a US defence supplier domestically.

Adam Smith’s defence of the UK Navigation Acts was occasioned by Britain’s 18th-century vulnerability to interdiction by foreign powers of its sea routes upon which it depended for international trade and supplies. On the Continent, the other European powers had contiguous land borders that they defended with their standing armies, which were also the ‘last word’ of the ‘Emperor’ in domestic governance.

Defence was the ‘first duty of the sovereign’ (WN V.i.a.1: 699) and in general ‘defence is of much more importance than opulence’, (WN IV.ii.30: 464-5) for without secure defence barbarian neighbours may be tempted to invade and end a country’s opulence.

Government is a monopsony buyer of defence goods and such firms engage in powerful lobbying of politicians to secure large defence contracts, even when technologically superior equipment and platforms are available from allies at better prices.

Britain built its 74-gun warships for the Royal Navy, though naval officers and men knew that the French version of the 74-gun warship was considered superior to British build vessels using local timber from British vessels and a domestic designs. When the chance arose to capture a French 74-gun ship there was a trade-off between the amount of damage a British ship was willing to inflict to secure their surrender and the amount of damage that would render the French ship unseaworthy as a prize of war for adoption as a British war ship into the order of battle.

As prize of war, French ships were highly valued by the Admiralty and were also highly regarded by British sailors for their sea worthiness and their fighting capabilities. In order to rub the French noses in their losses of their 74-gun ships, the Royal Navy kept their French names and inserted ‘HMS’ in front of them, hence, the British order of battle at sea listed many French names among the British built ships throughout the Nelson's navy.

A gory statistic was that many more British sailors were drowned in British warships foundering in storms than were killed in action against enemy ships.

The purchase by the US of some air tankers – the object of the complaints discussed by William Hawkins (now there is a venerable name from British Naval History!) in his article – is from a friendly NATO power, they are regarded as a better buy, and would be more efficient at maintaining US war planes in action for longer than the US version. The French order hardly dents US defence expenditure to make it anywhere near ‘dependent’ upon a ‘foreign’ supplier.

In Smiths’ day neighbours like Holland, France and Spain were recent ‘clear and present dangers’ to Britain. Today's France, Germany, Italy and Britain hardly qualify for that status, or for treatment under the equivalent of the Cromwell’s Navigation Acts(long ago repealed by Britain).

Allies in defence may safely trade in defence goods. The US opposition lobbying against them is a case of pure mercantile policy, to which Adam Smith would not have been sympathetic. That's not just good policy, it is also good political economy, the name by which Adam Smith knew his economics though long ago dropped by modern economists.

Lack of Competition in Alberta?

Ryan Dahlman asks in Prairie Post (Saskatchewan) HERE: “Moped anyone?” and rants about the Alberta motor insurance industry’s price hiking behaviours, in the course of which he asserts:

“The capitalist, free-market system is rearing its ugly head. Adam Smith's invisible hand has really helped the automobile insurance industry overpowered the weak grasp of the Alberta provincial government.

Like any major bank or oil company, billions of dollars of profits aren't enough, the Alberta Insurance industry wants more.”

Comment
Of the facts of the charges I know nothing and neither does Ryan Dahlman give his readers any. He quotes no annual accounts, gives no numbers, and is short of detail while eloquently long on accusations.

But if what he alleges are true, I can see a flaw in his involvbing the name of Adam Smith in the behaviour attributed to the car insurance, banks and oil companies of Alberta.

If all car insurance companies are hiking prices, then competition must be pretty low of non-existent, which is itself a sufficient condition for this behaviour to continue. It is also not a feature of market economies.

It’s not clear why Ryan thinks that increasing the ‘grasp of the Alberta provincial government’ will remedy this situation. Governments that collude with non-competitive market practices are culpable (it’s illegal to give or to receive bribes).

I am also surprised that there is a lack of price competition among insurance firms in Alberta (in Scotland they are at each others throats on price, plus the pressures of the on-line insurance price comparison sites bombarding drivers on tv).

“The capitalist, free-market system” is not “rearing” any head at all. That’s the problem in Alberta. Monopoly practices are not part of “free market” systems. Even when BP was state-owned in the UK it faced competition from private rivals. But if private ‘rivals’ are cartels or monopolies, that has nothing much to do with ‘free markets’. It’s usually caused by politicians legislating to ‘regulate’ markets, which often creates mini-monopolies, or CEOs colluding in loose cartels.

If premiums rise amidst competition, then profit margins may be under pressure from smash compensation pay-outs. Are Alberta drivers noticeably reckless compared to the rest of Canada, or are they paying for insurance losses in other states?

As for “Adam Smith's invisible hand” being to blame, this is a gratuitous insult to Adam Smith, thrown in from some misunderstanding of Ryan Dahlman’s knowledge of Adam Smith’s use of the metaphor. It certainly had nothing to do with markets, monopolies or otherwise, as revealed almost daily on Lost Legacy.

Is Homo Economicus a Sociopath?

Two posts arrived this morning of which I received extracts only because they were truncated behind ‘subscription’ and ‘permission only’ barriers, but which nevertheless hint at an interesting theme: ‘are people universally self-centred or self-interested, and does this account for what they do?’

Not surprisingly, Adam Smith is drawn into this discussion, often not for what he actually wrote but for what neoclassical economists claim that he wrote.

Samuel Bowles of the Sante Fe Institute and Universitá degli Studi di Siena, Siena, Italy opens the debate with an article in Science (here):

“High-performance organizations and economies work on the basis not only of material interests but also of Adam Smith's "moral sentiments." Well-designed laws and public policies can harness self-interest for the common good. However, incentives that appeal to self-interest may fail when they undermine the moral values that lead people to act altruistically or in other public-spirited ways. Behavioral experiments reviewed here suggest that economic incentives may be counterproductive when they signal that selfishness is an appropriate response; constitute a learning environment through which over time people come to adopt more self-interested motivations; compromise the individual's sense of self-determination and thereby degrade intrinsic motivations; or convey a message of distrust, disrespect, and unfair intent. Many of these unintended effects of incentives occur because people act not only to acquire economic goods and services but also to constitute themselves as dignified, autonomous, and moral individuals. Good organizational and institutional design can channel the material interests for the achievement of social goals while also enhancing the contribution of the moral sentiments to the same ends.”

Alan McDermid in The Herald (Glasgow) reports HERE on Samuel Bowles’s work:

“Or Adam Smith: "By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it."

He points to new experimental evidence that people often act against their own self-interest in favour of the common good, and they do so in predictable, understandable ways.

Among the examples he cites are six day care centres which imposed a fine on parents who picked their children up late. The effect? Lateness doubled, and it stayed high even when the fine was removed.

"Parents, it seems, stopped seeing lateness as an imposition on teachers, and instead saw it as something that could be purchased with no moral failing," says Mr Bowles.”

Comment
The problem is in the neo-classical model in the form of Homo Economicus, which wasn’t in anything Adam Smith said. As Lynn A. Stout, in reference to the cult of ‘Homo Economicus’, a pure invention of neoclassical economists from the 1870s that dominates teaching in universities here and in the USA: “Homo Economicus is a sociopath” (pp 158-9: ‘Taking Conscience Seriously' in Moral Markets: the critical role of values in the economy, edited by Paul J. Zak Princeton University Press, Princeton, 2008).

Incidentally, Paul Zak’s edited collection of essays is one of the most readable set I have read for some time. It should be read by sceptical economists (those sceptical about our own discipline or about those disciplines encroaching on our borders).

Alan Macdermid’s quotation from Adam Smith: "By pursuing his own interest (the individual) frequently promotes that of society more effectually than when he really intends to promote it" is misleading in this context. It comes from Wealth Of Nations (WN IV.ii.9: 456) and should be recognised immediately by regular readers as being part of the paragraph containing the ‘invisible hand’ metaphor. It is not a carte blanche for any and all exhibitions of self interest having beneficial effects, which is a view of Bernard Mandeville’s and not Adam Smith’s.

The example MacDermid quotes from Samuel Bowles’ paper about the school fining parents who were late in picking up their children (not having access to the paper in Science I have not read it) may not undermine the self interest arguments. The outcome of the fines was that lateness doubled: ‘Parents, it seems, stopped seeing lateness as an imposition on teachers, and instead saw it as something that could be purchased with no moral failing," says Mr Bowles.’

Surely, the neoclassical theorist would say that the parents who were in the habit of being late saw the fine as the school’s price for looking after their children when parents were late and judged accordingly that they could ‘buy’ more opportunities to be late, as well as those parents who were not in the habit of being late would judge the fine as a fair exchange for exercising lateness when it suited them more than the cost of the fine! Hence, lateness rose.

The choice for the school was to raise the price charged for late parents and for the school to pay an assistant to look after the children within the school. Clearly, relying on the parents to be ashamed of their behaviour from paying a fine was the wrong signal.

Unlearned Lessons from the Past

From Micha Gherter on the The Distributed Republic (17 June) HERE:

“Times Sure Have Changed Since Adam Smith”

“The Republican presidential nominee, John McCain, speaking on June 17, 2008 [via Matt Welch]:

There is the further problem of speculation on the oil futures market, which in many cases has nothing to do with the actual sale, purchase, or delivery of oil. [...]
[W]e all know that some people on Wall Street are not above gaming the system. When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising. And while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end -- using more and more of their hard-earned paychecks to buy gas for the truck, tractor, or family car.

Investigation is underway to root out this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk. Where we find such abuses, they need to be swiftly punished. And to make sure it never happens again, we must reform the laws and regulations governing the oil futures market, so that they are just as clear and effective as the rules applied to stocks, bonds, and other financial instruments. In all of these markets, reform must assure transparency, prevent abuse, and protect the public interest.”

Comment
I added the following comment to the post which quoted from Wealth Of Nations, though I am not sure that 'times have changed' because hostility to trading merchants was pretty violent before and during Smith's days:

Adam Smith was not just talking about 'speculation', which may or may not have a positive role; he was talking about the necessary role of distributors of the products of individual farmers who wee prevented from selling their produce to middle-man (the 'engrossers and forestallers') who would transport the produce to areas where demand for it was highest - hence where prices were highest and thus reducing excess demand and lowering prices (Wealth of Nations, Book IV, chapter 5, paragaphs 8 - 31, pp 528-34).

He favoured letting farmers specialise in farming, and 'engrossers and forestallers' (impolite names for wheat, etc., merchants) specialise in distribution. He said that regulating against merchants turned dearths into famines because the trade went secretive and when hungry people were angry people the risks of trading increased and prices became even higher.

Preventing oil price speculation in New York would not reduce the price as expected by politicans. Anybody with sufficient funds outside the USA can speculate on oil prices, which raises them in the USA anyway.

Prohibitions on oil - as on alcohol yesterday, and on drugs today -
will make a bad situation worse. What's Plan B then?

Market Outcomes Are Not Pre-Ordained

GUIDING HANDS (PLUMBING LIFE’S DEPTHS) (14 JUNE) HERE:

“Interesting chat with one of our friends this evening. We were batting around the big problems of the day; energy crisis, resource exhaustion, pollution, that kind of thing and looking at the various solutions proposed and possible.

One thing kept coming up, namely the fact that as energy prices soar, alternatives become more affordable comparatively and more time and interest focusses on solving the problem. Which sounds a lot like the magical guiding hand of Adam Smith taking care of us, if only we would be dispassionate voracious consumers interested solely in our own narrow self-interest.

Indeed, a lot of the issues, such as localizing production, encouraging more efficient usage/technologies, and lots of other necessary tasks are all addressed by the increasing cost of oil. So we don't have to do anything, apparently. After all higher prices and decreasing supply of oil (the peak oil theory) might force consumers to really solve the issue of climate change, to address it with hard choices that might actually impact their lifestyles and make a real difference.

Things such as driving less (or not at all), buying locally produced produce rather than that flown in from other countries, and using less energy. Once again, lassez faire economics solves a thorny issue in the most efficient and effective way possible, or so it would seem.

What's missing, though, is agreement to prevent alternative, just-as-bad (or worse) technologies from showing up as solutions to the "problem" of high oil prices. That is, the guiding hand may very well discover a solution worse than the original problem. Particularly when we do not have an economic cost associated with pollution, the market does not attempt to optimize out the pollution. Of course, that's what the cap-and-trade proposals are about, making the cost of pollution visible to the market forces. How successful they could be remains to be seen.”

Comment
The author spots the flaw in the assertion, credited to Adam Smith, but not what he actually said. He did not say there was mystical force at work – the so-called invisible hand metaphor was not a general statement about what happens.

It was not a theory, or a concept: it was a metaphor used in a particular instance to explain to those readers who did not follow his explanation for some merchants choosing to send their capital abroad to the British colonies in America or to the East India Company(both of which held Royal Charters that awarded them monopolies trade), and other merchants who chose, from their risk aversion to trade locally.

Nor did he advocate laissez faire (words he never used). He actually supported, in the interests of national defence) the Navigation Acts which only permitted British ships, with British crews, and British owners to trade with the colonies.

His analysis of market trade in Books I and II of Wealth of Nations did not mention invisible hands or guiding hands or laissez faire. It explained how price changes could influence suppliers to increase or decrease output and consumers to increase or decrease their purchases. In markets, it’s not what everybody does in the same way but what a majority do that determines and outcome.

If more people economise on oil products and switch to benign alternative fuels, then the eventual outcome would be as the author of the blog seeks; but if more people choose ‘worse’ alternative technologies it won’t be. Which it will be is not predictable, though we do know from experience that the choices imposed by governments are usually less than optimal.

Adam Smith and Social Evolution

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Llamas and my stegosaurus (14 June) HERE:

“Another Chapter”

"As every individual, therefore, endeavors as much 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 labors 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 worse for the society that it was not 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." (The Wealth of Nations)

Adam Smith realized that markets were capable of coming up with answers to questions that no human had the ability to solve. It was as if the system itself were exhibiting intelligent behavior. This is what he referred to in 1776 as “the Invisible Hand.” Today, scientists would call it emergent behavior in a complex adaptive system. But this behavior posed a problem—how did it happen that the world would be arranged in such a way that individuals seeking their own ends should happen to lead to such a happy state? For Smith, the answer was clear: God designed it that way. Leaving aside the theological question, however, what he proposed was perhaps the first realization of the idea of a creative rational mechanism: a designer (in this case God, but without necessarily using superhuman intellectual ability) could create a system that was capable of coming up with rational and creative decisions through an arrangement of many components, each following simple rules.

Comment
The quotation from Adam Smith is from Book IV.ii.9: 456 and as usual the interpretation put on it is less than satisfactory for reasons discussed regularly on Lost Legacy.

The statement that “ This is what he referred to in 1776 as “the Invisible Hand” is quite misleading. As is this too: “how did it happen that the world would be arranged in such a way that individuals seeking their own ends should happen to lead to such a happy state.”

A moment’s thought about this assertion shows it to be false. All human actions whatever their motivation or none have consequences. Sometimes these consequences produce ‘happy states”, broadly applied, and as many others produce ‘unhappy consequences”.

What happened to the so-called ‘invisible hand’ then? The history of the world is replete with unhappy consequences of human actions, well recognised and identified in Wealth Of Nations. They provide rich sources for many other quotations thrown out by people who, for the most part, we can be sure have never read Wealth Of Nations for themselves.

Adam Smith refers in Books I and II of Wealth Of Nations to over 50 instances of people acting in their self interests (as they see them) in which the outcome for society is less than beneficial. These two books cover a third of the Wealth Nations and in none of these instances (nor indeed in any others) does he mention ‘an invisible hand’. The metaphor was not a general consequence at all.

To say that: ‘It was as if the system itself were exhibiting intelligent behavior’, is nonsensical statement.

‘Systems’ do not create or exhibit ‘intelligent behaviour in any sense that it might mean for a human or other animal intelligent behaviour. Societies are not ‘intelligent’; the people in them may be, but they do so as individuals. What the author is trying to slip in is something akin to ‘an intelligent designer’, by which we move into the realm of the supernatural, and of which nothing can be said (who or what designed the intelligent designer’?).

“For Smith, the answer was clear: God designed it that way”. I beg to differ. It is anything but clear in Smith that this was his meaning. He wrote his books and delivered his lectures within the imposed consensus of his day, much as academics in Soviet Russia and its client states were careful to slip in phrases from Marx to pass the vigilant eyes of the state commissars. Smith and others were obliged to nod to the Church vigilantes who could make life difficult for people suspected of apostasy.

Emergent behaviours that improved the survivability of an individual and progeny in their environments, if replicated across the group, spread and continued to ‘improve’, not consciously but by ‘conversation’ and ‘exchange’. Those behaviours that had a different outcome, led the group to extinction over time.

Each of the apprximately 20 predecessors of the Sapien species in the main survived for a million years; Sapiens have existed, so far, for upwards of 60,000 years, perhaps more, but nowhere yet as it lasted as long as its predecessors. And it has been, at several stages, minutely close to extinction, ‘saved’ only by minimal changes in behaviours, and locations that made those marginal differences (a single bush fire or similar ‘accident’ could have made a fatal difference).

Smith was on the right track but did not have enough knowledge of what we know now to have completed his social-evolutionary analyses.

Neat Illustration of the Meaningless Metaphor of An Invisible Hand

Erin Craig write on Terrapass blog (HERE):

“Non-financial barriers: a personal confession”

“What keeps us from moving forward with personal conservation?” (15 June)

“So why haven’t I lifted a finger? Am I lazy? Uncommitted? Irrational? Doesn’t Adam Smith’s invisible hand indicate that economically attractive pursuits will be pursued?

Maybe if I had that invisible hand, I would get these things done. But I don’t, I have only my two ordinary hands and they feel awfully full when I consider the phone calls, the design and technology choices, the bids, the fear of making the wrong choices and getting poor results or even getting good results but being ripped off in the process.”

Comment
She about sums up the meaningless of the metaphor turned into a metaphysical reality by its misuse by Chicago readers of quotations from Adam Smith from the 1950s onwards. Smith’s notion was much more sensible – a metaphor for human motivations (risk aversion) leading some, but not all, merchants to prefer to home trade to the higher risks of foreign trade and the lobger turn around of their scarce capital.

In Erin’s, case she wants to install heating system and drought-resistant grass in her yard – her commitment to the environment – but has to overcome her lethargy before undertaking the ‘toil and trouble’ of implementing her commitment. She notices there are some monetary incentives that may persuade her to make the phone calls. If she acts to affect her choices – moves her finger to call the number – she goes ahead; if she continues to dither for any reason, and does not act she doesn’t.

Why this needs an invented myth about invisible hands when the explanation is so obvious, can only serve the interests of those who want to mystify how markets work (as may be said of the General Equilibrium theorists).

Adam Smith fully explained why some merchants act in spite of their risk aversion to foreign trade – they had an alternative in domestic trade – and why some merchants felt compensated by the higher profits for their higher risks by acting to engage in foreign trade. His metaphor helped those of his readers unfamiliar with political economy; it was not meant to create a spiritual gloss on what was so reasonably explained.

Light Blogging Today

I am returning to Edinburgh today (Saturday) and do not expect to resume Bloging until tomorrow, Sunday.

For my journey I am re-reading Madeville's 'Fable fo the Bees' and associated materials. I might report something on this sideline work.

Have a good day...

Adam Smith and 'Neoliberalism'?

The Manila Times (14 June):

The Other View by Elmer A. Ordionez HERE:

“The ideology of neoliberalism that replaced Keynesianism (state intervention) and now governs UP is a recrudescence of classical economics from Adam Smith.”

Comment
As a rant, Elmer A. Ordionez is readable, but as for his views having any relation to Adam Smith’s political economy, he writes nonsense.

David Hume's Tomb in Disrepair

Adam Morris in The Edinburgh Evening News (13 June) announces that The Hume Enlightenment Trust is seeking "to raise £250,000 to repair and restore David Hume's mausoleum at the Old Calton Burial Ground."

It says urgent work is needed on the 230-year-old monument because there is no-one to officially maintain it.

Built in 1778 by one of Scotland's most famous architects Robert Adam, the monument has lain untouched for centuries.

But the charity said a revamped mausoleum could become a major tourist attraction and reinforce Hume's influence on the Enlightenment era.

The organisation's administrator, Rachel Lee, said: "Hume's Mausoleum is of enormous importance to free thinkers throughout the world, both as a symbol of Enlightenment values and a memorial to one of its greatest figures.

"The aim of this project is to ensure this remarkable structure is preserved for future generations. Both David Hume and Robert Adam are huge names and deserve to be remembered.

"No-one has really had the remit of looking after this, so it's been left to the elements.

"We want to promote this campaign as widely as possible and raise the money to carry out the first part of the work." Mr Adam built the monument two years after Hume's death, and the trust said such iconic structures were crucial to the preservation of the era and how it can still applied in today's world.

"It was a fitting tribute by Scotland's greatest architect to not only Scotland's greatest philosopher, but arguably the greatest philosopher ever to write in English," Ms Lee added.

The monument was created using the extremely durable Craigleith stone, but over the centuries the effects of weather have had a detrimental impact.

Economist and contemporary Adam Smith said of Hume, who was born in 1711: "Upon the whole, I have always considered him, both in his lifetime and since his death, as approaching as nearly to the idea of a perfectly wise and virtuous man, as perhaps the nature of human frailty will permit."

Comment
Another worthwhile project for Edinburgh to promote. David Hume was an intellectual giant among a lot of giants at work during the Enlightenment.

The erection of Adam Smith's statue in the vicinity of where he lived, worked, and is buried in a few weeks time and the purchase (hopefully) of Panmure House in which Adam Smith lived from 1788-90 is part of an awakening of many people all round the world to the history of this small city's contribution (pop. 23,000 in the 1750s) to world development.

Hume and Smith were friends, though Smith thought that Hume's tomb (for which he left provision in his will) was too ostentatious for his own more frugal tastes and manner of living. Hume read Wealth Of Nations just before he died; he considered it a great success for Smith.

Young Economists Appreciate the Adam Smith Born in Kirkcaldy

My Google search produced news of an interesting Blog (HERE:)

Undergraduate Economist ‘(‘Perspectives of an Economics Student’), with a post (13 June) from Alex M Thomas in India:

“On the ‘Invisible’ Adam Smith”

“This post mainly deals with the common misconception about Adam Smith, whose name is known to all students and professors of Economics; the misconception being the notion that he advocated laissez-faire. Sadly, his works are not as known. (Though the names of his two major works are widely known) So, this post tries to makes visible what is commonly invisible regarding Smith.

In the Indian Schools, textbooks in Economics associate him with the ‘wealth definition’. In Frank ISC Economics, which is authored by D K Sethi and U Andrews, Adam Smith is supposed to have defined Economics as “A science which enquires into the nature and causes of wealth of nations.” Definition is “a concise explanation of the meaning of a word or phrase or symbol”. [Dictionary.com] Adam Smith has never defined Economics i[n] the afore mentioned way. Is it ‘right’ to teach such ideas? Isn’t it against the ethics of academics? A large number of students are programmed in such a way in school, whereby their notion of economics is constituted only by neoclassical economics. Plurality in economics has been totally done away with. Teachers teach what is printed in the textbooks. No questions are asked.
Also, it is not surprising to see classical economists (Smith, Ricardo, Malthus, etc) being seen as ‘classical’ or rather irrelevant, because of either their naive assumptions or their bad theories.

The primary focus of this blog post is to argue that Adam Smith never advocated Laissez-faire. Let me put forth two instances where such a misconception has been put forth.

The following paragraph was published in The Hindu Young World, a widely read Indian Newspaper.

Adam Smith’s fundamental proposition was that a free market is a self-regulating mechanism and tends to produce the most desirable types and quantities of goods.
The second instance is from Economy professor, an online dictionary of economics.
Adam Smith’s fundamental argument was that individuals should be allowed to pursue their own private economic interests as much as possible and so long as they do not violate basic principles of justice.

Smith called this the invisible hand of the market - although everyone is acting in their own self-interest, they are led to achieve the good of all as if by an invisible hand of economic forces. Therefore, outside interference will inevitably lead to disaster. This became known as laissez-faire economic policy.

In fact, there is very little evidence to state that Smith advocated ‘free markets’ through stating the importance of self-interested behaviour. Also, he viewed individuals as a part of the society and not like an individual that is cut off from the society - the Homo economicus. Sen rightly points out that “it is precisely the narrowing of broad Smithian view of human beings, in modern economies, that can be seen as one of the major deficiencies of contemporary economic theory.” [Sen, A.K. 1987: Economic Behaviour and Moral Sentiments. On Ethics and Economics. OUP].

Comment
I am encouraged that recently graduated students have picked up on the central message of Lost Legacy. Recently, I corresponded with an graduate economist from Oxford University. It augurs well for the future.

In the preface to Adam Smith’s Lost Legacy (Palgrave Macmillan, 2005) I opined the wish that:

‘…by the third centennial aniversary of Wealth Of Nations in 2076, the distinguished participants will convene to celebrate what Adam Smith actually intended and not merely to recount the fables created by those who misappropriated his legacy. That is my motive for writing Adam Smith’s Lost Legacy.’

Whether the participants do so depends on what young economists do during their careers, especially in research and teaching.

Given the increased longevity now being experienced in the world, expected to be experienced across a wider population in the coming decades, it is possible that some of you reading this in your early 20s will attend the 2076 anniversary. It’s down to you to ensure that they celebrate what the Adam Smith who was born in Kirkcaldy in 1723 actually believed and wrote about and not the ‘Adam Smith’ from empty hologram invented in Chicago’s 54th Street in the 1950s.

Congratulations to Alex Thomas for his post. I have bookmarked his site to follow his progress.

Thoughts About Here and Getting to There

Sheldon Richman writes a punchy piece in Media With Conscience (HERE):

“Independent Migrants, Welfare, and the Law”

Extract:

“The division of labor

What the “economic” case against immigration misses is that there is always more work to be done than workers to do it. In a world of scarcity, our wants are limitless. At any given moment we can’t have everything we want. So whenever we can obtain things cheaper than before, we free up labor and resources for more and better things. If migrants are willing to work for less and competition drives down the prices of their products to consumers, more resources and labor will be available for new production. This is how economies grow and living standards rise.
The anti-immigrationists see the productive side of the newcomers (as though that were a bad thing), but they miss the consumption side. Immigrants buy things. New demand requires new supplies. That in turn creates new opportunities for entrepreneurs and workers.

If lower-wage workers coming to the country are a threat to the American people, then so are such workers who stay in their home countries and export their products to the United States. In other words, the anti-immigrant logic leads to economic autarky. But if anything is well established in economics and common sense, it’s that autarky is the road to poverty. The division of labor is the key to ever-increasing prosperity, but as Adam Smith famously wrote, the division of labor is limited by the extent of the market. If, as most people believe, a U.S.-wide division of labor (including free movement and free trade) is good, then a hemispheric division of labor is even better — and a global division of labor is best of all (until we discover other planets with productive beings).

One caveat: the American economy is not a true free market but a government-saturated corporatist system. In part that means taxes and regulations restrict competition, inhibiting new entrepreneurs from challenging incumbent firms. In such circumstances, the ability of the market process to create new opportunities for workers is constrained and the adjustment to new conditions is slower and more difficult. This is what gives surface credence to the anti-immigrationists’ economic arguments. But as we’ve seen, the fault lies not with migrants but with government intervention in the economy. What needs cracking down on is not poor people who freely move to where capital and opportunity are more abundant but politicians who think they can run an economy.”

Comment
Immigration is a contentious issue all over the world, including from one country to another, and from the countryside to the cities. Both are perceived to cause a lowering of the quality of life for those already resident in the country receiving the immigrants and those already resident in a city not able to accommodate a sudden influx of people.

Getting from here to where we think most things will be better is an imponderable problem with no easy – and maybe even difficult – solution.

Adam Smith wrote about Britain as it was and suggested many things that would make it a more opulent country, especially for the majority of the population whose labours supplied the bulk of what most people could afford with difficulty on their wages and a minority could easily afford without having to labour to earn their incomes, and an even smaller minority who could afford whatever they wanted but preferred for various reasons to better themselves by diverting their incomes from spending to saving and investment.

What stands in the way of all such would-be possibilities is what Smith called the unalterable prejudices of people guarding their bits of ‘privilege’ as they see it.

So what is more likely to happen is not much is going to change, at least quickly, or quickly enough, to avert disappointment.

Digging Started On Site for Adam Smith's Statue's Plynth

More news of the unveiling of the statue of Adam Smith in Edinburgh on 4 July announced today in The Edinburgh Evening News (11 June 2008) by Michael Blackley:

"AN annual Adam Smith day is set to be staged in the Capital by the group behind a new statue of the famous economist on the Royal Mile.

A two-day series of events to commemorate the giant of political thinking is to take place this year to mark the unveiling of the 20-foot statue of Smith in Parliament Square on July 4.

The Adam Smith Institute – the authoritative research body behind the statue – is planning to give the celebrations an annual place on Edinburgh's events calendar.

Dr Eamonn Butler, director of the institute, said the commemorative day would attract academics and Smith enthusiasts from around the world.

Prime Minister Gordon Brown and Margaret Thatcher are among those he hopes will attend in the future.

Debates, lectures and exhibitions are among events planned for the day, which would also involve an annual re-dedication of the new statue.

"Adam Smith has an enormous international fan club – that is one of the reasons it is important to do this," said Dr Butler.

"The tomb site in Canongate kirkyard is not very impressive and neither the church nor the council wants large numbers of people traipsing across the graveyard to see the tomb. This is a chance to recognise him in an appropriate way."

Nobel Laureate in economics Vernon Smith is to unveil the statue on July 4. Organisers expect around 200 people to attend the ceremony, including academics from across Europe, the United States and Canada. A debate, titled "This house would prefer to be led by an invisible hand" is to be held in The Caves on South Niddry Street on 3 July, featuring debaters including former Scottish Secretary Michael Forsyth.

An exhibition of Smith books and papers will be held on 4 July, followed by a dinner at Edinburgh University's Playfair Library.

The new statue has been created by Alexander Stoddart, the sculptor who made the David Hume statue on the Royal Mile. Preparations for the new statue have already started, with the area where it is to be erected – the bottom end of Parliament Square – being fenced off in preparation.

Although many statues have been the focus of anti-capitalist protests, Dr Butler played down the chance of something similar happening to Smith.

He said: "With almost every statue you get a traffic cone on its head, but few get damaged. Adam Smith is accepted by the left and the right. He believed in the free market because he thought it was the best way to help the poor."

Comment
There may also soon be the welcome news if the Scottish Government approves the purchase by Edinburgh Business School, Heriot-Watt University of Panmure House, the last building still standing that is associated with Adam Smith from the 12-years he lived there, and which Edinburgh Business School plans to renovate as a education centre for the post-graduate study of Adam Smith political economy and modern post-graduate economics.

The detailed plans for the two days, 3rd and 4th July, are still shaping up. It looks like it will be intensive and well supported. As I get more details (I return to Edinburgh on 14 June for more hand-on activity supporting the events) I shall post them on Lost Legacy.

The Remedy for Pakistan is in the Fate of its Economy

“Our Urban Nightmare” by Mir Adnan Aziz (6 June) in Counter Currents.org (HERE):

“We long for a spiritually satisfying niche, a human habitat that cooperates with our biological nature, a community rich with multifarious interactions. Communities are living, growing organisms that need constant internal regulation and whose health should be based upon happiness alone. 'No society can surely be flourishing and happy, of which the far greater part are poor and miserable'. Adam Smith made that statement back in the 18th century. It holds true for the Pakistan of today.”

Comment
The article is about the social situation in Pakistan amidst major changes in its composition, particularly urbanisation when people are leaving the land, where life is tough, and moving to the slums in the cities, where life is also tough.

Adam Smith’s comment quoted by Mir Adnan Aziz is about the social situation in Scotland in the 18th century when the country was on the verge of its commercial society moving through economic growth to the ‘industrialisation’ of the economy that transformed its economic opportunities from general destitution to a steady rise in per capita incomes on a scale never seen before in all history. Though it did not look like that to those involved – it took four or more generations – and there was much misery to go through yet.

Adam Smith was actually discussing another problem – nobody knew at the time what was really happening to Britain – the end of the Malthusian Trap, at least as experienced by the labouring poor. The middle classes were doing better and some among the chattering classes that ran the social system complained about the early signs of change in that they had a view that if the real wages of the poor improved they would become dissatisfied with their current economic circumstances!

“The common complaint that luxury extends itself even to the lowest ranks of the people, and that the labouring poor will not now be contented with the same food, clothing, and lodging which satisfied them in former times, may convince us that it is not the money price of labour only, but its real recompense, which has augmented.

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater oart ofnits members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.” (WN I.viii. 35-6: p 98)

That was precisely what the commercial economy was supposed to do: spread opulence. Presently, Pakistan is a long way from achieving a beginning or of sustaining it.

It has a long way to go before the labouring poor of Pakistan can ‘be flourishing and happy’ and meantime ‘the far greater part of the members’ will remain ‘poor and miserable’. It could start on that road if it allowed its nascent commercial economy to grow, as Adam Smith realised when he studied what caused the wealth of nations.

Freedom and liberty will achieve the goal better than any known alternative. But nobody has a right to cease being 'poor and miserable', but they can achieve that goal is they are free to participate in a commercial economy with a supportive government that knows when to facilitate commrce and when not to intervene on the side of monopolists (capital and labour), but always on the side of consumers in competitive markets.

Noted in India

Savitri Era Political Action by Tusa N. Mohapatra, India blog (here) links a post to Lost legacy: “Adam Smith’s important message: we serve our self interests best by serving the self-interests of others”

Comment
I am pleased that other Blogs find interesting material among Lost Legacy posts and I am happy to see them disseminate ideas expressed here to their readers when they provide a link for their readers to connect to read the original articles..

Recently, I have noticed more economics, politics and moral philosophy Blogs in the Indian sub-continent posting materials from Western sources. This is encouraging.

I am not concerned with the politcs and ‘nature’ of these host blogs. In the exchange of ideas, concepts, views on history, and such like, such activity is good in its own right.

Mistaken Identity of the PM and a Debate on Adam Smith's Mistaken Identities

The Edinburgh Evening News (part of The Scotsman group) 7 June, we get this gem:

“CHANCELLOR of the Exchequer Gordon Brown is opening a cutting edge research base in Edinburgh today.

The Fife MP is due to launch the E-Science Centre at Edinburgh University, where he read history when he was an undergraduate.”

Comment
Oh dear! Gordon Brown is the UK Prime Minister and no longer the Chancellor of the Exchequer (otherwise known as Alistair Darling, MP, member for Edinburgh Central).

Is the Evening News economising on sub-editors? Does nobody read the reporter’s copy before sending it to press? Has the news not yet reached the reporter who wrote the above nonsense that Mr Blair is no longer the Prime Minister and that Gordon Brown took that job over last year and now has the worst polling scores of any recent UK PM?

Next reference: “Mr Brown is also expected to take part in a debate on economics at the Playfair Library, Old College, tonight.

The event, which has been sold out for four weeks, will see the Sunday Times’ economic columnist Irwin Stelzer and director of the centre for History and Economics at King’s College Cambridge Emma Rothschild locked in discussion about economist Adam Smith.

The debate is entitled: “Can Both the Left and the Right Claim Adam Smith?”

Comment
I would like to have attended that debate but I am in France until 14 June. Irwin Seltzer has been criticised on Lost Legacy for his misleading statements about Adam Smith (most recently on Adam Smith's alleged views on inheritance taxation), so I expect nothing much from his contribution.

Emma Rothschild is a senior academic who is an excellent exponent of Adam Smith’s legacy (she is one of the few economists who recognises the nonsense written daily by economists, let alone media people, on the invisible hand and who advances an excellent study of the subject in her book, “Adam Smith, Condorcet, and the Enlightenment”; see Chapter 5: The Bloody and Invisible Hand. Harvard University Press, 2002. I expect her to emphasise Adam Smith’s humanitarian credentials.

As for Gordon Brown’s views, in the past he has claimed Adam Smith for the Left, in so far as ‘New Labour’ is social democratic (see Iain Maclean’s, "Adam Smith: radical and egalitarian”, Edinburgh University Press, with a forward by Gordon Brown, 2005.

Given the prime Minister’s present political problems and his determination to get back to his political roots, he most likely will delve into a leftish case for Adam Smith’s alleged ‘social democratic’ leanings.

That such discussions are pretty pointless, given that ‘Left’ and ‘Right’ were categories created post-Adam Smith’s death in 1790, I expect slavoes of quotations, torn out of context and hurled across the debating floor without too much attention to context or to Adam Smith’s legacy.

Gordon Brown may play up Adam Smith’s Hanoverian sympathies, making him what today we call a 'Unionist', thus enabling the PM to bash the Scottish National Party and the case for Scottish independence.

As I vote in Scotland, I shall read reports of the debate with interest and I feel free to comment on it in line with my self-denying ordinance not to comment on politics except in relation to the country I vote in,

Walraisian General Equilibrium a Dead End

Edward Lotterman teaches and writes in St. Paul, Minn, and posts an interesting piece in the Idaho Statesman (here) (6 June):

“Adjustments take time in a rapidly changing economy

For many products, prices and output overshoot, for both good and bad

“If Leon Walras' auctioneer did his job, running a business would be easier. One might say the U.S. economy "is in a dynamic state" right now. (That's an old Vietnam War phrase for "nobody knows what heck is going on, but it ain't good.") Rapidly changing economic conditions force changes, but such adjustments seldom are instantaneous. That complicates life for people producing all sorts of products.

Walras was a French-born 19th-century economist. Going beyond Adam Smith's metaphor of "an invisible hand" in explaining how markets work, he suggested the mental image of an auctioneer.

In modern economies, everything links to everything else in a complex web. Food prices depend on grain prices that depend on fuel prices. Demand for bass boats depends on demand for overtime carpenters' labor that depends on demand for houses. Wal-Mart's profits, compared with ritzy department stores, vary with household optimism or pessimism. The cost of flying to Los Angeles or having something trucked to Paducah increases with fuel prices, and so on.

Walras' imaginary auctioneer illustrates how markets solve these complex interrelationships. All producers and consumers submit bids to the auctioneer listing what quantities of things they are willing to buy at which prices and what they are willing to sell. The auctioneer tabulates the bids and announces who gets to buy or sell how much of each item at what price. He then bangs his gavel, and the economy moves forward to a new round.

As a mental model, Walras' auctioneer is useful. The real world, however, seldom is so smooth. It is as if some bid slips fall to the floor while being handed to the podium or the auctioneer errs while totaling some column.

Right now, many important factors - energy costs, housing prices, interest rates and inflation - are changing quickly. Such changes affect myriad other variables - eventually.

Adjustments are inevitable but not necessarily to a new, stable equilibrium. For many products, prices and output tend to overshoot on both the upside and downside.
This pattern of delayed adjustment to changing prices creates familiar expansion-contraction cycles in many industries beyond livestock, trucking and construction. If only Walras' auctioneer were a little better and faster at his job.”

Comment
This is a ptetty good account of the Walrasian auctioneer, both illuminating what he is supposed to be doing and what actually happens, crowning the account with the futility of general equilibrium economics.

In fact, Lotterman brings out something very important for all economists truing to model real world economies – there ain’t no such thing as equilibrium. This is a futile quest that was initiated in the 1870s that helped to re-direct economics into the pursuit of mechanical perfections akin to how the physical universe was supposed to work, using 19th century mathematics under the auspices of turning economics into a ‘hard science’.

The habit of extracting conclusions from such models overcame the reality that changes in economic variables are not made with infinite velocity. The humans in the system do not switch on an off immediately. Change takes time and is not synchronous.

Read Lotterman’s full article (via the link) to see how he expresses this simple and immovable fact.

Indeed no economic state starts at equilibrium. The variables are already changing, probably unnoticed, because the people who make the changes are already under the influence of pressures not captured in the models, some responding positively and some negatively. Some are going out of business and others are joining the complex supply chains that affect with their outputs the inputs of many businesses.
The auctioneer model is a nice try. It still leads to a dead end, even if elegantly imaged as a general equilibrium equation.

Adam Smith used the metaphor of ‘an invisible hand’ (WN IV.ii.9: p 456) to explain the consequences of varying degrees of risk avoidance among some, but not all, trading merchants who decided, some totally, some partially and some not at all, to allocate their capitals between the foreign trade of consumption (mainly with the British colonies in North America under the protections of the trading monopoly of the Cromwellian Navigation Acts, as amended, but also to the East India Company) and their domestic markets close to their home domiciles.

His account of the making of the common labourer’s woollen coat showed the complexities, extent and multiple locations of the supply chain that made them in 18th century Scotland. The multiple opportunities for disequilibria even in this single supply chain makes it obvious that the economy as a whole was beyond being modelled in a state of general equilibrium without the most unrealistic prior assumptions and the necessary absence of people. Change in real time is not instantaneous. Speeding up the work of the Walrasian auctioneer will not solve the problem.

For a start, economic equilibrium does not exist in the real world and the real world does not change with infinite velocity. Adam Smith did not make this mistake and nor did he make the mistake that inexorably follows from it: he didn’t try to predict the future. He preferred to look backwards in time to try to explain what had happened, not what might happen in future.

Firms and governments that hire forecasters, supply them with powerful computers, add their research staff and administrators, simply waste the money that pays for them all, at some cost to their alternative uses. Worse, firms and governments that act on their forecasts are yet more prodigal with scarce resources, net of the purchases by deluded other users of the outputs, but gross of all the resources spent on following the ‘predictions’