Saturday, December 20, 2008

Adam Smith Quotations Out of Context

Maureen Tkacik writes in Vanity Fair (18 December) Here:

Ponzi Nation: What Spitzer, Madoff, Geithner, and Adam Smith Can Teach Us About Our Own Mass Stupidity”

“The scale and simplicity of the Madoff scam seems to be moving the conventional wisdom in a sober new direction: We all fooled ourselves somehow by believing vast wealth could be easily generated. But here is a bit of actual wisdom, courtesy of Adam Smith

But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin”.

Luckily for America, profits are expected to be pretty low this year

Beware of Adam Smith quotations from authors who do not give a source; it usually signifies that they have not read Wealth Of Nations or Moral Sentiments. OK, so it’s only Vanity Fair, but the habit extends to economists writing in media publications too.

For the record, it’s from Wealth Of Nations at WN I.xi.p: p 266, or Canann,1937 ed. pp 249-50.

However, Adam Smith is discussing long term trends in the fundamentals of economies not annual fluctuations. So ‘pretty low’ profits for ‘this year’ are, well, meaningless in terms of the quotation. But Maureen Tkacik is in the good company, so to speak, of many professional economists who quote (but probably don’t read) Smith, Ricardo, and Marx, on the same theme of the rate of profit falling with economic prosperity.

Some have even found 'evidence' that this signifies the terminal decline of capitalism. Adam Smith saw the decline in the rate of profit as evidence of prosperity, which he never confused with a decline in the absolute amount of profits in a society.

If real wages rose secularly over the trend, this was the ‘spread of opulence’ that he welcomed; necessarily, if real wages rose as a trend then profit rates would fall as real incomes transferred from capitalists to labourers. Look at what he says a few lines down from the out-of-context quotation from Maureen above:

Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” [WN I.xi.p.10: p 267; Canaan, p 250]

If real wages decline in the USA that is because those concerned among modern day 'merchants and manufacturers' are persudaing legislators and those who influence them to bias the tax system and to narrow the market for their products.

I am most grateful to Vanity Fair for provoking me to add a little knowledge to Lost Legacy’s weekly output.

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