Sunday, October 05, 2008

Misquoting Adam Smith Undermines Analysis

In what is otherwise a fairly sound analysis of the current crisis, Marc Chandler in Seeking Alpha (HERE) asks: ‘What happened to Free Markets?’, in the course of which, unfortunately, he makes these remarkable assertions:

The whole notion of an economy as a separate sphere of activity is nonsensical. The patron saints of the church of laissez faire, Adam Smith and David Ricardo, thought they were analyzing political economy. Moreover, they understood this political economy to be a moral economy insofar as it tried to promote certain values and behaviors. Pssst, Adam Smith was a moral philosopher.”

Adam Smith never said he favoured laissez-faire (he never used the words). He was not in favour of laissez-faire though he knew those among the French Physiocrats who advocated such a system. His writings on the economy included many statements that were contrary to laissez-faire, not the least that he was suspicious of the motives and behaviours of ‘merchants and manufacturers’ who could not be trusted because when left alone they sought to expand their markets and narrow the competition in favour of their local and colonial monopolies.

So Adam Smith would have made a poor ‘patron saint of the church of laissez-faire’. The reputation Smith’s alleged passions for such notions as laissez-faire is wholly inaccurate and borders on the irresponsible, and comes from attribution by modern economists and not from the works of Adam Smith (which most of them have never read). As for David Ricardo and laissez-faire I leave it to Ricadians to comment.

There is this myth that once upon a time there were free markets and then the state encroached. But what was meant as allegorical has been assumed as fact. The narrative is simply not true. Positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold. The corporate form of organization has been sanctioned by the state. The state's power of taxation can have significant impact on the incentive structure for economic activity.”

If there is such a myth prevalent across the world it had nothing to do with what Adam Smith wrote about. True, he was a moral philosopher, but he was also an historian and there is nothing in his works to suggest he believed that ‘free markets existed and then the state encroached’.

His Lectures on Jurisprudence, delivered in Glasgow University 1762-4 (and most likely before that from 1751-62) do not mention any such historical state of affairs.

Indeed, Smith's lectures, which covered pre-history to the 18th century, show that once property was ‘invented’ about 8,000 years ago and civil government established, the state has had a continual existence in all the millennia since. Moreover, Wealth Of Nations, which covers a similar time span (after all, large parts of it are verbatim from his Glasgow lectures), is focused on his critique of mercantile political economy, which is largely about state-led intervention in markets, which link directly to his non-recognition of the relevance of laissez-faire assertions to the markets that he discussed.

It was not ‘positive state action was needed to turn the factors of production (land, labor and capital) into commodities that could be bought and sold’. That is to miss the whole point about societies bedded in property relations. It is the establishment of systems of justice that are critical to society and not ‘positive state action’ (Book V, Wealth Of Nations) which were firmly approved of by Adam Smith ('without justice society would crumble to atoms').

There is no doubt that ‘The state's power of taxation can have significant impact on the incentive structure for economic activity’ (when added to state borrowing powers). The modern state is a major economic player (between 30 and 45% of the GDP in peacetime, potentially rising to 80 percent in wartime (UK: 1942-45), and near 100% in state-run economies (Soviet Union, etc.,).

Relying on inaccurate statements about Adam Smith undermines Marc Chandler's analysis.



Blogger MarcChandler said...

Thanks for the recognition, butin your haste to defend Adam Smith, you did not read what I wrote carefully. I never said he fvored laissez faire orthat he used those words. I said that others who do believe in those things see in Adam Smith an articulation and defense of some of their own positions. I also never said that Adam Smith believed that the economy was a separate sphere. I link that not to him but to have the laissez faire view. i do think that general idea is a myth that it widely shared, but you are right i never conducted a survey or can demonstrate that the myth exists.

7:57 pm  
Blogger Gavin Kennedy said...

Thanks for your comments.

Let me assure I do not act in 'haste to defend Adam Smith'.

Of the many dozens of daily references to Adam Smith, I select one or two that by revealing what he actually wrote in contrast to what many people assert he wrote, readers will be helped to understand what he actually was about, rather than continue to believe what commentators claim he believed.

The myths certainly exist - that is all too obvious from the articles from around the world that I read.

If you think I misrepresented you, I apologise for doing so.

8:30 pm  
Blogger MarcChandler said...

Isn't that the point...I mean how can I possibly mis quote him when I never quoted him in the essay. If people who defend laissez faire mistakenly expropriate him for their own ideological purposes and has become a symbol of something greater than himself, is not symbol a fair object of commentary ? I think that a carefully reading of my short essay does not offer a much different read of Adam Smith than the one you suggest. I am critical of the views of those who claim him. It is ironic too that Marx reportedly once said that he was no Marxist.

10:58 pm  
Blogger Gavin Kennedy said...

I have no wish to prolong this exchange. You have made your position clear (I did not think it was clear as you wrote it) and I have apologised if you feel that I misrepresented your intended statements.

I did this because your satatements: 'The patron saints of the church of laissez faire, Adam Smith and David Ricardo, thought they were analyzing political economy' is open to more than one interpretation - the one that I took from reading the sentence as it stood, and yours that you were referring to what other people said about Smith and Ricardo and their alleged adherence to laissez faire.

If you had writtten it as clear statement that Adam Smith did not advocate laissez faire despite what others say about him now, there would have been no incentive for me to comment.

If we want to be clearly understood we ought not to leave room for such fundamental misunderstanding.

I did not have similar trouble with the rest of your article.

6:41 am  
Blogger bradbrusavich said...

Professor Kennedy,

I have been intrigued by your blog posts and feel fortunate to have stumbled upon them in my research for a paper in a competitive analysis and business cycles course paper. The first paper asks us to respond entirely to Adam Smith's (supposed) ideas about division of labor, self-interest and the invisible hand and how they are relevant today; how supply and demand reflect Smith's invisible hand concept; ands lastly, what a current example of Smith's invisible hand concept would be.
If I am understanding correctly, Smith's reference to the invisible hand was more a common metaphor of his times rather than a statement on economic conditions, theory or an economic idea or philosophy. Have you read "Adam Smith and the Invisible Hand" by Helen Joyce from Cambridge University?

7:28 pm  

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