Saturday, May 31, 2008

Socratic Philosophers Starting From False Premises

The Socratic Society (HERE) announces it next Discussion Group on 3 June – “Ethics and Economics”:

Adam Smith, a Scottish moral philosopher and political economist, wrote one of the most influential pieces for market based economics. In ‘The Wealth of Nations’ (1776), he held that the ‘invisible hand’ of the market, along with free trade in a laissez-faire system, was the most desired method of organising and structuring an economy and is still taught in economics. However, Smith included certain moral restraints within this piece which have largely been forgotten today.

Economics has also taken some of its most important theoretical material from Utilitarianism, created by Jeremy Bentham and John Stuart Mill, which is the idea that the moral value of an action is determined solely by its contribution to the overall utility in maximizing happiness or pleasure of the greatest number. There is clearly a link between the two disciplines both in their origins and in their intended purposes. But in today’s consumerist society is this link still visible or has the increasing desire for economics to be seen as a scientific subject created a gap that is now too wide to recover from and is there a need for ethical considerations in the area or economics or should we leave the market alone?”

Memories of late-night undergraduate philosophy debates remind me that there is something in it about the conclusion being only as good as the premise (or was that a logic debate?).

Adam Smith did not say anything about or similar to “the ‘invisible hand’ of the market, along with free trade in a laissez-faire system, was the most desired method of organising and structuring an economy and is still taught in economics”.

The metaphor of ‘an invisible hand’ did not refer to markets, nor was it mentioned in his chapters (Books I and II) on markets, and neither did he refer to ‘laissez-faire’ anywhere in anything he wrote.

Despite these facts, the only part of the first sentence that is true that the myth of the invisible hand and the words laissez faire are “still taught in economics”.

But they have nothing to do with Adam Smith on markets and are only believed to be so because repeaters of the canard have not read Adam Smith’s Wealth Of Nations, but have copied what their tutors (who almost certainly have not read him either) told them.

Not a good start for a philosophy debate, I should think.

A Philosopher Muses in his Cups....





Gavin Kennedy

Roger Scruton, normally a philosopher (of a right of centre disposition), who has to be read carefully to comprehend his meaning, turns in a lighter piece in the New Statesman( 29 May) HERE.

Of Dogs and Rye

Nothing goes better with an evening in Virginia than a glass of whiskey, writes Roger Scruton

"If ah git to heav'n, then fust thing ah do is shake that man's han' as invented whiskey."

Only in rural America will you hear a remark like that. I suggest that whiskey was not invented by a single person, but emerged, as Adam Smith would say, by an "invisible hand".

"Well, ah gonna shake that han', too." "Amen," adds the chorus, for we are in Southern Baptist country, and God's ears are pricked. I question whether an interest in whiskey would survive the passage through the pearly gates, to which I receive the sensible reply: "So why did he get us all so innerested in whiskey down here?" God has a lot to answer for in old Virginia

How do you shake ‘an invisible hand’? Lazy journalists, academic economists who should know better, and now, major brained philosophers, think ‘Adam Smith’ and immediately think ‘invisible hand’, even though the metaphor meant one thing to Adam Smith and something entirely different to the aforementioned people.

Adam Smith most definitely would not say whisky (nor US whiskey) 'emerged' by via invisible body part, unless said philosopher had imbibed some of the 'water of life'.

Friday, May 30, 2008

Nothing Coming In and Therefore Nothing Can Go Out

My email server provider is down for what is described as 'make over', also known as an 'improvement', plus new features, most of which I probably won't use. But that is what providers do; they change their provision, often without notice (compare how The Times suddenly improved their log-in routine for the cryptic crosswrod and screwed up their members' access for weeks), and cause mayhem when they intended 'improvement'.

It's a version of T5 on line.

So, without emails and search facilities I am cut-off from matyerial for Lost Legacy.

Apologies until I can resume services.

Wednesday, May 28, 2008

It's a Cartel That Causes Oil Prices to Rise

On Human (‘leading the conservative movement since 1944’ Gustavo Coronel writes on ‘Oil Panic on the Rise’:

Somebody seems to have cut Adam Smith’s invisible hand, at least in what pertains to the market dynamics of the international oil industry. In the past the price of oil in the world markets has followed rather closely the ups and downs of supply and demand. As demand exceeded supply prices rose, national economies in the developed world slowed down, oil demand fell and this, in turn, produced a drop in the price of the product. This “thermostat” effect worked rather well during the oil crises of the 1970’s but it does not seem to be working well today.”

‘Somebody’ – who?, what?, when?, how?

I don’t recollect anything about invisible hands when Adam Smith explains how market and natural prices interact under changing conditions of supply and effectual demand in Book I of Wealth Of Nations (Chapters V, VI and VII).

In fact, Adam Smith was quite clear about how markets work and so are those who read his book –it’s those who have never read his book who invoke the mysterious invisible hand at any opportunity like automatons just to get name recognition to what they write.

However, it seems to me that in Gustav Coronel’s case (clearly a brave man who has stood up to the dictator, Hugo Chavez, who ‘designated’ him ‘as an "enemy" of the Chavez regime’, a designation I am sure he wears with pride, and for which libertarians salute him) in his article on the ‘mystery’ of the perpetual rise in oil prices he does not name the reason: oil prices are determined by a producers’ cartel, many of which are hostile to the USA and other western powers.

In the simplistic theory of cartels, as taught in modern classrooms, they are inherently unstable, and in time the business passes back to competition, after which the class moves onto something else.

National governments tend to legislate to break up cartels. That isn’t happening in the oil business for political reasons, not least that the component parts of OPEC, in line with such as Russia, their hostility (and in Saudi Arabia’s case its ambivalence) runs deep, and the cartel works because its members exercise self-discipline, for which they benefit manifestly.

Students of political economy understand this.

Monday, May 26, 2008

Mike Gorski Understands the Metaphor on An Invisible Hand

Mike Gorski writes and interesting take on the metaphor of the invisible hand in the neighbourhood blog, Seattle Post Intelligencer – USA, HERE:

At least it afforded the opportunity to catch up with some folks that used work in town or live in town. And from there I lamented on both the invisible hand of the market and good news, bad news jokes. The origin of the invisible hand is pretty clear, you can read about it in Adam Smith's The Wealth of Nations and marvel at its subsequent misuse. There is no clear bloodline as to where the Good News, Bad News joke started and bored itself into our culture.

Even though Adam Smith intended the use of his imagery of the invisible hand of the market to make a point regarding foreign trade, it has since been usurped to either mean that the market knows best or that the market operates with a certain caprice, depending on your particular political philosophy. In the case of DuPont, it moves stealthily to provide for our community what our micro-economy will bear. It seems absurd to outsiders that six square miles can lay claim to two manicurists, two dentists, two gas stations, three coffee shops, three sub shops, three pizzerias, and four east Asian eateries


Mike Gorski gets the invisible hand closer to what Adam Smith intended. Congratulations to him! I spend time on Lost Legacy correcting misinterpretations of Adam Smith's use of the metaphor,by professional economists, point out, it is in Book IV of Wealth Of Nations, on mercantile political economy and not in Books I and II, which deal with how markets in commercial economies work without mentioning anything about invisible hands.

Yet modern economists continually assign to the metaphor an exalted status - some actually believe it is something real and not an isolated metaphor, in this case of risk avoidance by merchants contemplating the uncertainties of foreign trade with the British colonies in North America and choosing to invest domestically, thus increasing domestic annual product (the whole is the sum of its parts: increase parts of domestic investment then domestic production necessarily rises by the laws of arithmetic).

Mike Gorski writes a nice story too, which you should read via the link above.


Sunday, May 25, 2008

Oil and Electoral Politics

Chad Gray (25 May) writes:

“The Case for Not Drilling ANWR”

“Drilling domestic oil reserves (read: ANWR) has been, and will continue to be, a hot political topic, with the pro/con sides wrapping themselves in the US flag and Greenpeace flag, respectively. I'd like to wrap myself in the Adam Smith flag and make a case for not tapping into the reserves, just yet...

Being an economic realist (and a political cynic), I've observed that the ONLY thing which has really catalyzed the kinds of economic investments we've seen in the past couple of years (offshore drilling technologies, alternative energy research, etc...) that will end up providing the 50 year solution to our dependence on foreign oil has been the recent short term (past 2 years) surge in oil prices.

Tapping this oil now would be the equivalent of a 40 year old tapping into his 401k account to pay down your mounting credit card debt. Magic! Problem solved, except the part where you continue with your same spending habits that ran the credit card debt up in the first place (spending more than you make), and you've depleted an asset that would've been much more valuable a couple of decades later - when you really need it.

While it's painful in the short term, living with scarcity is the best way to assure future availability. Just ask Adam Smith

It's not clear to which Adam Smith we should look to for advice on this issue. The Adam Smith presiding over modern economic theory from the environs of Chicago or the Adam Smith who was born in Kirkcaldy in 1723. Markets operate in the public view and the consequences of oil demand outstripping current supply leads to rising supply prices. That’s economics.

The same prices are under the influence of the OPEC cartel, which controls how much oil is supplied to the world market. That’s political economy.

Oil prices are a political decision of the major suppliers; not a physical shortage. The OPEC countries use the same argument as recommended by Chad Gray to justify keeping the oil taps closed compared to them being fully open. By doing so they maintain a high current price (now rising rapidly) and receive more income now from consumers.

Chad Gray suggests that the US (and any other source of Non-OPEC oil) should restrict exploration and delay the creation of the infrastructure of new oil fields (production fields, pipelines, shipping, refineries and distribution), to reinforce OPEC’s ability to exploit its cartel prices.

Now the first rule of electoral politics is to get re-elected. How would politicians ‘sell’ the policy recommended by Chad Gray? It could be a hard sell.

Even if they started on the policy now, to which he suggests they don’t, this doesn’t turn on a domestic supply tap instantly. There would be a lag before oil flowed at any level to affect OPEC, even marginally, perhaps beyond the next election, with the sitting government’s flank exposed to a populist opposition.

In short, there is a political dimension to the debate, which Adam Smith certainly took into account. That is why economics was called ‘political economy’ in his day. If Wealth Of Nations was solely about economics as we know it, he would have published it as a single, much shorter, volume. But then it would not have had the impact it deserved.

A Professor's Accurate Statement on Invisible Hands

Robert H. Frank writes in today’s (25 May) New York Times, “The Invisible Hand is Shaking’.

Now before I comment on his article, note that Professor Robert Frank is an economist at the Johnson School of Management at Cornell University, which means he will have more regular contact with senior managers and business executives than is the norm for those solely confined to teaching neoclassical economic theory to undergraduates with limited work experience and barely no managerial experience, and to tutoring post-graduates, whose fraternisation with research texts and data sets is legendary, unlike many of the professors of economics in academe, whose familiarity with Adam Smith’s writings are fragmentary and their business experience somewhat limited to the theorems of the imaginary world they work in which is captured in mathematics.

There seems to be a difference between those who have read for themselves Wealth Of Nations (and Moral Sentiments) by the Adam Smith who was born in Kirkcaldy, and who have met and mixed with the people who make business decisions in the real world, and those who haven’t read his books for themselves – they believe in their tutors’ versions of the ‘Chicago Adam Smith’ – which confines their dexterous competence to the movement of their imaginary ‘wooden pieces’ on the imaginary ‘chess board’ of their theories of their imaginary economy (see: TMS VI.ii.2.14-18: pp 232-34).

So read what Robert H. Frank says about the misuse of the metaphor of an invisible hand (it’s music to my ears’…):

ADAM SMITH’S modern disciples are far more enthusiastic about his celebrated invisible-hand idea than he ever was. In their account, Smith’s assertion was that purely selfish individuals are led by an invisible hand to produce the greatest good for all. Yet Smith himself was under no such illusion.
On the contrary, the relevant quotation from his “Wealth of Nations,” which describes a profit-seeking business owner, is far more circumspect. It says that this owner “is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” It continues: “Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it

In short, Smith understood that the invisible hand is often benign, but not always. This understanding has important implications for economic policy in general, and for the recent presidential campaign dust-up about gasoline taxes in particular.

If you believe, with Smith’s modern disciples, that unfettered pursuit of self-interest always promotes society’s interests, you probably view all taxes as a regrettable evil — necessary to pay for roads and national security, but also an unwelcome drag on economic efficiency. The problem, according to this view, is that taxes distort the price signals through which the invisible hand guides resources to their best destinations

Smith’s more nuanced position supports a different view of taxes. When market prices convey accurate signals of cost and value, the invisible hand promotes the common good. But prices often diverge from cost and value and, in those cases, taxes can actually help steer resources toward more highly valued uses.

It’s helpful to look more closely at why the invisible hand works so well in many ordinary markets. Consider the market for potatoes: in it, production and consumption are determined by millions of separate cost-benefit calculations. Profit-seeking sellers are willing to offer an additional pound of potatoes for sale whenever the benefit of doing so — as measured by what buyers are willing to pay — is enough to cover the cost of production.

The market reaches equilibrium when the cost of producing the last pound is exactly equal to its value. If the costs incurred directly by sellers are the only relevant costs of expanding potato production, and if the benefits to potato buyers are the only relevant benefits, the invisible hand gets things just right.

The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high. Suppose that pollution costs are $2 for the last gallon consumed, but that its $4 price at the pump is just enough to cover its direct production costs. Reducing production and consumption by a gallon would then cause consumers to lose fuel that they value at $4, which would be exactly offset by the $4 in reduced production costs. The $2 in reduced pollution costs would thus be a net gain for society.

That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.”

“… THAT the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses

I like the way Professor Frank draws attention to the resticted application of the metaphor to decisions made in pursuit of their self-interest being 'benign'. This concurs with Adam Smith's examples in Books I and II of Wealth Of Nations that show about 50 occasions where the outcome of self-interested actions were well short of being benign in their effects on society.

Moreover, he does not even mention the invisible hand in Books I and II (which cover the workings of markets in detail). In fact, Adam Smith's only reference to an invisible hand is in Book IV and had nothing to with markets.


Friday, May 23, 2008

The Necessary Role of Property in History

‘Bill’, self-described as a ‘non-violent’, ‘liberation socialist’ writes in his Blog, HighBoldtage (‘politics and music in Humboldt County’), without comment (HERE):

“Adam Smith”

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”
-Adam Smith

Bill tags his post in his own index as: ‘economy, fascism, land, poverty, private property, privatization, rent’, which raises the minor question of why only one 20th century political regime is linked to Adam Smith (or vice versa), and why not any of the others too? More commonly, he is linked by socialists to socialism or social democracy, both only slightly less absurd than his alleged link to Mussolini’s Black Shirts.

Smith held no public views on party politics and there is a modern controversy (historians of economic thought are a querelous lot) of distant vintage about his personal politcs – was he a Whig or a Tory? Eminent scholars disagree, largely by admitting to not being able to discern in Adam Smith a consitent set of ideas that conveniently fit into any neat modern concept of a political philosophy. For the best account of his views see: Donald Winch, Adam Smith’s Politics: An Essay in Historio-graphic Revision, New York: Cambridge University Press, 1978.

However, readers should be grateful that ‘Bill’ has extracted this particular quotation from Wealth Of Nations because it provides an opportunity to discuss the very points that Adam Smith was making. Here is the quotation in full:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.

The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.”
[WN p 67]

This paragraph contains an historical account of a significant change in human circumstances, which ‘Bill’ has skipped over: the emergence of property, not by a political revolution, nor ordained, inevitable, or widespread geographically. Before this event, small populations of humans everywhere lived as hunter-gatherers and the majority of them continued to do so, and some remnant populations survive on the margins still.

For hunter-gatherers, the “wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them”.

The invention of (communal) property, to the exclusion of outsiders was inevitable when human populations grew and remained concentrated in a relatively small area. Ten thousand humans depending on hunting for subsistence in a continent-sized territory (India, China, the Americas, Europe and Australia) could subsist in a steady state for millennia, and we assume that for a long time that is more or less what happened. They could always disperse and move on whenever, as Smith put it, the ‘chase’ became ‘precarious’, or if relations within and among the various bands became turbulent.

Once shepherding evolved beyond tending to the young of killed animals and was practised through breeding, the need to keep flocks and herds from wandering away, and the need to keep wandering humans from taking them away, introduced, slowly and gradually, concepts of property and all that went with them, first as communal property (jealously guarded against other communities) and eventually as private property (jealously guarded against all comers).

The later developments in agriculture had the same effect, only more intensely, because farming was more propitious for its evolution as a new mode of subsistence. It also changed everything else in respect of the ownership of the products of labour and the necessary co-operating factors, which reduced the share of an individual labourer in the final product by including the shares going to the other owners of the contributing materials, their dexterity and technology, and most particularly the owners of the land. This was no longer a simple case of the exchanges between the arrow maker and the hunter, based on their unambiguous (Natural Law) ownership of the products of their labour, before and after the transaction. The evolution of property was associated with the need for adjudication in disputes, the emergence of ‘norms’, ‘rules’ and ‘laws’, and for their enforcement by civil government.

Because primitive exchanges made those participating in them ‘better off’ (a major incentive of the division of labour), they had a self-reinforcing effect over time of encouraging pair-wise exchange behaviour throughout a band and, later, between bands. Therefore, Smith’s unique vision of ‘truck, barter, and exchange’, as the precursor to a social-evolutionary road for those who stepped onto it, is of the utmost significance for all that followed. Those that did not take this step, for multitudes of reasons, there being nothing ordained about individuals undertaking social change, remained subject to their existing mode of subsistence because ‘the original state of things’ for them continued, at first uninterrupted (they could migrate outwards), and later ended by inter-marriage or violence, as the ‘superior’ subsistence modes spread. (Extract from my Adam Smith: a moral philosopher and his political economy, Palgrave Macmillan, July 2008)

After property was invented, aligned with politico-religious institutions of civil government, the settled societies changed in kind and scope. Thus ‘Bill’ posts on his Blog on the Internet and we read it thousands of miles away dispersed around the globe.

He describes himself as a ‘libertarian-socialist’ and thousands of us have some idea of what he is talking about, whereas before the Age of the Hunter passed in a few small territories to the Ages of Shepherding and Farming, our predecessors (and, be sure, we share them as ancestors) spoke highly localised languages, intelligible to few humans outside their territories, and of whom, for millennia, they knew little if anything about.

Of relevance to a ‘Libertarian-socialist’, if one had ever been alive in ancient times, is the thought that it could have been different to what it was; that property as we understand it could have been more equally shared and not have accumulated in the hands of a few men (the ‘rich landlords’), who ‘love to reap where they never sowed’. Such experiments may well have been tried (in pre-history by definition, nothing was recorded!). We do know of one such experiment in legislation, introduced by one of the most authoritarian of regimes of all times, the Romans. Smith discusses the subject in Wealth Of Nations:

Rome, like most of the other ancient republics, was originally founded upon an Agrarian law which divided the public territory in a certain proportion among the different citizens who composed the state. The course of human affairs by marriage, by succession, and by alienation, necessarily deranged this original division, and frequently threw the lands, which had been allotted for the maintenance of many different families, into the possession of a single person. To remedy this disorder, for such it was supposed to be, a law was made restricting the quantity of land which any citizen could possess to five hundred jugera, about three hundred and fifty English acres. This law, however, though we read of its having been executed upon one or two occasions, was either neglected or evaded, and the inequality of fortunes went on continually increasing.” [WN: IV. Vii. 3: pp 556-7]

My brief point is that equality of property (or, indeed its absence) is not something that has been successful (it didn’t survive hunter-gathering, which is egalitarian at a low level of subsistence, and without the other attributes of knowledge that are beneficial) and where attempts have been made to enforce it from the top is soon corrodes under the normal human afflictions of family generations and their eternal verities – families with more sons than daughters acquire property by inheritance.

I submit these thoughts to ‘Bill’ for his consideration.


Thursday, May 22, 2008

Snouts in the Trough Despite Economic Illiteracy

The Spectator Business column HERE
carries an article by Tim Worstall, the thorn in the side of sloppy economists, on an Open Letter from Jacques Delors and Jacques Santer (remember them?), with other signatures from other economists and socialists, to Jose Manuel Barros, President of the European Commission.

Tim Worstall comments that Adam Smith was not in favour of laissez-faire and I endorse that assessment. The notion that he was the ‘father’ etc., of laissez-faire was an invention in the 19th century of economists and legislators to justify (i.e., earn fees, praise and social standing from doing so) the rapacious demands of mill owners and others to continue with impunity the mutilation of men, women and children by their unsafe, fast-moving machinery and the inevitable ‘accidents’ of the 12-hour-plus days that they made them work.

They made similar assertions about their versions of ‘capitalism’ and Adam Smith, even though the word and the phenomenon were unknown to him; the word was not invented until 1854 (Thackeray’s novel, The Newcomes), long after Adam Smith died in 1790.

The letter from Delors and Senter, et al, also asserts that ‘Financial assets now represent 15 times the total GDP of all countries’. I would worry if they were’nt!

Of course the assets of ‘hedge funds’ are bigger that Gross Domestic Product, a spurious comparison that is being repeated all over the place by the Left.

GDP does not measure the asset value of an economy; GDP measures the added value per year of the country's asset value, in much the same way as profit measures the added value of the capital of the business.

The profits from hedge funds should be compared with the GDP, not their asset values. To say that the asset values exceed the GDP is misleading (and ridiculous), just as saying that the profits from an enterprise exceed the capital stock of the enterprise.

Stocks and flows are different entities; rising profits enhance the value of capital stock and falling profits lower it. If the flow profits from a stock of capital exceed the asset value of that stock of capital, truly, you have discovered El Dorado.

To what end have these gentlemen written their Open Letter? To urge The EU Commission to set up (urgently, of course) a special committee to examine the problem they identify, with the usual stipends, lush offices, secretariat and research grants for those scores they hire. I am not yet cynical enough not to gasp at their impertinence. Trough snouting knows no degree of embarrassment, apparently.

Traffic Through Lost Legacy

I have noticed an increase in visitors to Lost Legacy over the past year. It took some time to get to about 3,000 readers a week.

In 2008 over 5,000 visitors a week view over 9,000 pages, according to ‘Go Daddy’ Traffic Facts.

These numbers are more liberal than the ultra- conservative ‘sitemeter’ on the Blog, which this week gives over 2,000 visitors and 2,500 page views – clearly there is a different ‘counting’ criteria operating on the two systems.

Since Lost Legacy opened in February 2005, ‘Go Daddy’ shows 405,414 ‘unique’ visitors and 1,520,542 page views, which is quite impressive for a narrow issue Blog, likely to appeal to a relatively narrow readership, most of whom probably do not agree with our presentation of Adam Smith’s ideas as he wrote them.

Judging by the relative paucity of comments through the years since Lost Legacy began, I assume that most visitors, especially regular ones, read the Blog for information about Adam Smith and not because they agree with what they read.

Long may this continue, because sooner or later the penny may drop and then some readers under the spell of the Chicago version of Adam Smith will see the Kirkcaldy Adam Smith in a new light, the light I believe he intended.

Thank you for visiting whatever your reasons.

Tuesday, May 20, 2008

The Malthusian Trap Is Not the Whole Story

I am more than usually busy just now – my book (Adam Smith: a moral philosopher and his political economy) was finished sometime ago and I heard today that it is into production.

But that affects me less, as I am busy contributing a chapter to an Danish academic book on negotiation (due this week), completing a read through of the manuscript for my fourth edition of book for The Economist (due end of June), and writing a final draft of my paper on ‘Adam Smith’s Theory of Bargaining’ for the History of Economics Society annual conference in Toronto at the end of June, due next week. And there is always a demand from my old day job for exams and solutions for three graduate courses I used to teach.

But I tend to read, last thing at night, books on different subjects (novels if I have them) and at present I am reading Robert Payne’sThe Christian Centuries from Christ to Dante’, 1966.

I too am surprised what books are on my shelves from yesteryear stored in my house in France. I didn’t acquire this book from a religious interest in the topic; my motives for doing so are forgotten now, but my interest this last couple of weeks (I usually manage up to a chapter an evening, though that varies) is from a discussion we were having some months ago on Gregory Clarke’s book, Farewell to Alms (Princeton University Press) on the Marginal Revolution Blog, with some side comments on Lost Legacy.

The proposition that I lodged at the back of my mind which did not seem to fit the assertion that population grew (excluding the Black Death years), subsistence incomes had remained the lot of the population (the Malthusian trap) for millennia. Now, I didn’t deny the statistical evidence; I had trouble reconciling the facts with other evidence that this was not the whole story.

Societies were changing slowly and remained unequal; a necessary consequence of the Adam Smith’s last three Ages of Man (shepherding, farming and commerce). The elites of these societies certainly were not generally on subsistence compared to the majority of their populations. They lived differently, if in many years the differences were marginal.

But, and this is what irritated my understanding of Greg Clarke’s thesis, from the great agricultural settled societies onwards, these settled societies (unlike the mobile shepherding tribes) were associated with stone buildings, defensive walls, armed retainers on them, religious mystics and rituals, later, with special buildings (temples, synagogues, churches), and in some cases, philosophers.

Now all these had to be paid for (even in conditions of slavery), both materials and wages (subsistence goods), or circulating capital in Adam Smith’s theory of growth. The only source of this capital is by extraction from annual revenue of society, which the ruling elites controlled. If this diversion is significant (and it was) the per capita subsistence of the majority is not the key statistic about what was happening from the first millennia of commerce.

Moreover the products of what we call stone-based ‘civilisations’ had a lasting impact on future generations in wide areas of knowledge, the pre-condition of the technology that made what is called the ‘industrial revolution’ possible and the almost simultaneous solution to the Malthusian trap as Malthus was writing his book about it.

Back to Robert Payne’s Christian Centuries, which details the stone-built evidence of centuries of architectural monuments, ever greater in their magnificence, to the extraction thesis applied across Europe. Judging by the accounts in Payne’s book, the substance of my nagging doubts about Clarke’s focus on per capita incomes seems firmer now than before.

But then I am only up the 12th century (‘The Gothic Splendour') of Christian Rome’s complicity in the extraction process. I shall press on with the next chapter in 30 minutes.

Good Night...

Sunday, May 18, 2008

A Libertarian Supports Purchase of Panmure House

David Farrar writes in his Blog: Freedom and Whisky (‘A libertarian returns to Scotland’) on the continuing debate on Panmure House:

Responding to Alex:

Alex Massie has picked up on the sale of Adam Smith's house:
“They chose the £800,000 bid over a higher offer, on the grounds that the University would make the building more accessible to the public. The University plans to restore the house to promote the study of economics. Hmmm. Wouldn't it have been more appropriate to sell to the highest bidder?”

In one of the comments Gavin Kennedy writes:

The difference in the bid was £150,000, a rather small amount which will be more than covered quickly by the commercial operations of Adam Smith's former home (1788-90) in pursuit of academic excellence in economics.
This is also a public benefit, which was lauded by Adam Smith.
“I'd like to enlarge on that observation with a nod in the direction of the Austrian School of Economics.

Values are subjective. We each have our own unique scale of values and if that weren't so no trade would be possible at all. Let's imagine that I'm in the market for a property. I might be happy to pay £250,000 for a flat in central Edinburgh but another person might well prefer to spend the same amount of money on a sizeable house in rural Fife. And I might be willing to spend a bit extra on a place in Edinburgh simply because it had once been owned by Adam Smith! Others wouldn't. Values aren't limited to monetary considerations.

So I would argue that the City Council hasn't necessarily sold the Smith abode to a low bidder. It all depends on the Council's scale of values and those values can include a keenness for a particular future use of the property. From its point of view the Council has sold to the highest bidder. For once, in this case the Council's scale of values is not unlike mine!”

Some commentators to the various Blogs that have remarked about the sale of Panmure House demonstrate their philistine nature by simply demanding that the City of Edinburgh Council sell to the ‘highest bidder’, or demolish Panmure House and turn it into a MacDonalds, or some such atrocity.

I am pleased to see that a Libertarian takes a more intelligent stance.


Friday, May 16, 2008

Bid Details for Panmure House Released

Edinburgh City Council’s Report and Recommendation for the Sale of Panmure House (Adam Smith’s home from 1788-90) in Favour of Edinburgh Business School, Heriot-Watt University is available HERE.

In this report the details of the contending bids are discussed and the reasons why the Council recommend the Bid from Edinburgh Business School, Heriot-Watt University, even though it is the lower of the two bids by £150,000.

It is clear that the bid from the University is judged to bring greater economic benefit to Edinburgh over the private developer’s bid, and greater benefit to the wider international academic community. The small difference in price would soon be overtaken by the greater economic use of Panmure House as an educational centre for studies by visiting scholars, post-graduate students, members of the public and visitors to Edinburgh interested in the life and works of Adam Smith and political economy.

Much credit goes to the international academic community, 135 of whom signed the letter to the Council expressing support for the Bid (without reliance on public funds).

It remains now to hope that the Scottish Government agrees to the sale to the bid with the greatest public benefit – at no cost to the taxpayer.

It remains now to hope that the Scottish Government agrees to the sale to the bid with the greatest public benefit – at not cost to the taxpayer.

You can read illustrated details (HERE):
of the Panmure House Project, organised by economists at the University of Edinburgh, who played an important role in securing the vote within Edinburgh City Council for the decision to support the EBS Bid.

Thanking Russel Roberts of Cafe Hayek

Russell Roberts on Cafe Hayek (HERE), presents the views of Adam Smith on a European's reaction to the news of an earthquake in distant China (then a two or more years round sea trip to and from Britain).

The quotation from Moral Sentiments (TMS III.4: pp 136-7) is often misread by people in a hurry who draw the wrong conclusions form it (discussed on Lost Legacy several times). I am pleased to report that on this occasion, both in Cafe Hayek and in some other Blogs that have noted it, the full quotation is read and understood.

True, there have been a few silly comments from one or two of their readers, whose concern is that it is a long quotation which they find 'difficult' to read - for them the age of literacy is over; they have descended to the age of the sound bite, there being nothing in evolution or social evolution that says evolution is uniquely progressive.

I urge readers to visit Cafe Hayek, or to turn to pages 136-7 of Moral Sentiments, and contemplate Adam Smith as a moral philosopher and political economist.

Wednesday, May 14, 2008

Great News About Panmure House!

The Scotsman 14 May:

"University bids for Smith's home"

"An £800,000 bid by Heriot-Watt University to buy the former home of the "father of economics", Adam Smith, has been approved by councillors. The decision over Panmure House in Edinburgh's Old Town, where he lived from 1788 to 1790, will now be scrutinised by the Scottish Government. Councillors chose a lower bid over a £950,000 member of the public's bid so it could be "accessible to the public". Plans are to restore the house to promote the study of economics.

A higher bid was placed by, Laura Strong, who wished to restore and live in the property. She also planned to allow the public into the house occasionally throughout the year. However, it was not a "clean bid" as she put the offer in subject to a full structural survey. Councillors at Tuesday's Edinburgh City Council's policy and strategy committee decided to take the lower bid so that the building could remain accessible to the public.

Adam Smith was born in 1723 and died in 1790, aged 67. He is known primarily as the author of two treatises: The Theory of Moral Sentiments, which was published in 1759, and An Inquiry into the Nature and Causes of the Wealth of Nations, which was first published in 1776. Smith is also known for his explanation of how rational self-interest and competition can lead to economic well-being and prosperity.

University officials hope Panmure House, just off Edinburgh's Royal Mile, will "bring substantial benefits to the national economy" as well as place Scotland at the "international forefront for the study of economics". Heriot-Watt's Edinburgh Business School is one of the world's largest providers of postgraduate education in business, with more than 6,500 MBA students from more than 150 countries. The university's principal and vice-chancellor Anton Muscatelli said: "We are very encouraged by the council's decision to accept our bid and now hope for a decision by the Scottish Government which will approve our purchase. "An international economics centre will be of significant importance to the development of scholarly activity on the subject.

"We will be pleased if our purchase is successful and we can play a part in saving a building with such historic significance. "Adam Smith's impact was truly international and it is therefore very relevant that Heriot-Watt as Scotland's most international university should open and run this centre."

This is excellent news for the University and for Scotland. It remains for the Scottish Government to approve of the purchase of Panmure House.

In discussions among academic economists and commentators in Blogland, there have been a few from those who simply said: ‘sell to the highest bidder’ and who claimed to be speaking on behalf of the ‘authentic’ Adam Smith, heavily influenced by the creation of the epigones educated in the environs of Chicago University.

I prefer the actual views of the Adam Smith born in Kirkcaldy in 1723, an altogether different person to the Chicago ‘Adam Smith’. Frankly, these persons didn’t know what they were talking about, even making allusions to the use of public money. They didn’t understand Scottish property law by which all property is sold in sealed-bid auctions and in which the seller is ‘not obliged to accept the highest or any offer’ (it’s the owners property!).

A public authority is closely scrutinised by public regulators and, of course, by the electorate and by the media. There have been scandals recently in which Aberdeen Council sold properties well below (£1.2 million properties sold for £350,000) the District Valuer’s estimate of their worth and presently it is under investigation. In the case of Panmure House the district valuer’s estimate was £750,000 and Heriot-Watt’s bid was £800,000.

The higher bid of £950,000 was overridden by the Council on two grounds. First, it was not a ‘clean’ bid; it was conditional on a ‘structural survey’ being acceptable. But this is not a ‘sale’ until it passes the buyer's structural survey in the opinion of the purchaser, not the seller. For a house built in the 1690s (long before Chicago existed), the risk falls on the seller, not the buyer, who can pull out at no cost, and leave the seller to start all over again.

Meanwhile, Heriot-Watt’s bid was ‘unconditional’; the entire risk falls on the University, which cannot pull out and must hand over the full purchase price on the exchange of contracts (in Scotland: ‘the missives’).

Secondly, once the official valuation is met or exceeded by an offeror, the other grounds on which a public authority can accept a lower offer to a higher bid, is that it can demonstrate a ‘public benefit’ from doing so. I think readers can see the future use to which Heriot-Watt will put the building, as described by Professor Anton Muscatelli, the Principal of Heriot-Watt University I(and a leading Scottish economist). All bidders were required to describe in their bid their intended use of the building and there was a clear public benefit involved in the University’s bid that was not manifest in the higher bid.

I should add that though Heriot-Watt University is supported by public funds, not a penny in the £800,000 bid comes from public funds. The bid is financed by Edinburgh Business School a separate charity within the University, the entire funds of which are raised by its worldwide commercial educational work (it has 6,500 students, mainly overseas, all of whom are taught postgraduate subjects by distance learning and all of whom sit closed-book examinations, with no choice of questions, graded in Edinburgh and subject to External Examiners from other British Universities).

The building requires extensive renovation, and possible some structural work, which is subject to its status as an ‘A-listed’ building (the highest category of protection as a heritage building), which preliminary estimates suggest a sum of £2 to 3 million may be needed. This sum too will be raised from private sources.

Moreover, the professors at Edinburgh Business School are well-known for their Smithian free-market philosophy which is practised in all of their education work. As a charity it is non-profit, though it regularly makes a surplus over costs, all of which is devoted to its charitable objects, as required strictly by UK charity law.

Its management of Panmure House as a premier education centre will be characterised by its role as a net contributor to the University, which readers may rest assured would most certainly have been approved of by the Kirkcaldy Adam Smith.

I hope the recent detractors will reconsider the facts and drop their unhelpful assertions (and perhaps re-look at what they learned from the Chicago condition).

We Serve Our Self Interests Best By Serving the Self Inerests of Others

In The Daily Star (The newspaper for the heartland of New York) HERE
a correspondent, Robert C. Beckman, from Otego writes:

Deborah Tarrow's letter shows a lack of economics and history on her part. She decries making profit off the human need for food. Yet in Adam Smith's "The Wealth of Nations," he states:

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

Free markets work because Smith's observation provides the greatest social outcome. The greatest social good is achieved when individuals pursue their own self-interest

Not quite. The quotation from Wealth Of Nations (WN I.ii.2. pp 26-7) is accurate except for Robert C. Beckman’s explanation of what it means. Adam Smith’s point was that to pursue one’s self interest in respect of acquiring the ingredients for dinner, you have to address the self interests of others who have the wherewithal to supply you with the meat, beer, and bread in your 18th century diet. This is qualitatively different from simply pursuing your self interest in a one-sided manner.

You would seek your dinner in vain by only addressing your own interest to the exclusion of those who would supply it only if it were in their interest to do so (“and never talk to them of our necessities but to their advantages”).

Missing this important part out from the quotation, Robert Beckman, draws his conclusion: “The greatest social good is achieved when individuals pursue their own self-interest”, but because he does not make it clear that the transaction is not just a one-way personal benefit, he undermines Adam Smith’s important message: we serve our self interests best by serving the self-interests of others.

It is the mutual exchange of our offers that are in each party’s self interest, which creates the positive harmony of the commercial society. Exchange is not a zero-sum game: what I gain is not at the expense of what you gain – there is a mutual exchange that makes both of us better off than we would be without such an exchange.

I gain my dinner and you gain the wherewithal to acquire what you wish from third parties:

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” (WN I.ii.2: p 26)

Leaving this part of Adam Smith’s exposition unsaid, leaves the reader with the idea that the blind search for one’s self-interested requirements somehow leads to the ‘greatest social good’, which is a short step from asserting that it is OK to act selfishly because social benefits, a view that was anathema to Adam Smith, the moral philosopher and contrary to his meaning.

The Invisible Hand Strikes Again?

THE SUNCOAST NEWS (Pasco County, Florida)14 May, reports on local residents not wanting Wal-Mart in their midst, though it had all the permits from officialdom, but suddenly Wal-Mart decided not to build there because of the economic downturn. Its author declared that this was an example of Adam Smith's invisible hand:

Public protest and the ability to agitate for redress of whatever grievances we might have are rights as old as our republic. We take them quite seriously
Still, when it comes to getting things done, there's nothing like another concept that was put to paper during the 18th century, Scottish moral philosopher Adam Smith's invisible hand. There's nothing like the power of the market when it comes to getting things done

Yes, markets are powerful by signalling to people what they might choose to do if a situation persists. But this has nothing to do with Adam Smith and his use of metaphor of ‘an invisible hand’. It’s what people on the information they have and choose to do that moves markets, not disembodied hands.

Adam Smith’s use of the metaphor had nothing to do with his reference to ‘an invisible hand’ in Book IV of Wealth Of Nations; his statements on how markets work is stated in Books I and II and did not mention anything about invisible hands.

It's an everyday example of the myth of the invisible hand at work.

Tuesday, May 13, 2008

A Nearly Correct Account of Adam Smith's Views

Creating Community, 12 May, HERE:

Adam Smith
The invisible hand

There are two important features of Smith's concept of the "invisible hand". First, Smith was not advocating a social policy (that people should act in their own self interest), but rather was describing an observed economic reality (that people do act in their own interest). Second, Smith was not claiming that all self-interest has beneficial effects on the community. He did not argue that self-interest is always good; he merely argued against the view that self-interest is necessarily bad. It is worth noting that, upon his death, Smith left much of his personal wealth to charity.

On another level, though, the "invisible hand" refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations (although Smith did not, himself, use the term with this meaning in mind). For example, Smith says, if a product shortage were to occur, that product's price in the market would rise, creating incentive for its production and a reduction in its consumption, eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost plus a small profit, the "natural price." Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole anyway. This was later adopted as a universal principle by the laissez-faire economists of the 19th century.

Smith apparently used the phrase "invisible hand" only three times in his work. Later writers, both supporters and detractors, repeated this phrase far out of proportion to Smith's own usage.

I have taken the liberty to post the whole of the message because it is almost correct and I will not quibble on this occasion. It is almost 100 per cent more accurate than the usual assertions made about Adam Smith and his use of the metaphor of ‘an invisible hand’ and the term ‘laissez-faire’.

Congratulations to the unknown (to me) author.

OK. For regular readers: how would you comment on the reference of the author to markets as part of the meaning on 'an invisible hand'?

Monday, May 12, 2008

The Invisible Hand is the Actions of the People!

Bhekuzulu Khumalo writing for the Institute of Knowledge Blog (HERE) asserts that The Free Market Works (11 May):

People and societies have been trading for thousands of years, prices have risen and fallen for thousands of years. Economics trade was not brought about by colonizers and imperialists, this is one of the reasons for people being against the free market, they say it was brought by the imperialists. Not true, people have understood economics long before meeting with the white men, people have always understood that the price of grains rises in a drought, the value of cattle rises with droughts as they become fewer and therefore more precious, people have understood this fact for thousands of years, this fact was not brought about by an imperialist.

The market has always worked. It existed long before Adam Smith discussed it, Lao Tzu the Chinese philosopher, a man whose desire was that humans exist naturally, understood the concepts of the free market 2 000 years before Adam Smith and the European economists, though the peasants of Europe already understood that when there is plenty of grain the price of grain falls, when there is less grain the price of rises.

Lao Tzu’s understanding of the world can be summed in two quotes “Governing a great nation is like cooking a small fish, too much handling will spoil it”, and “A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say “we did it ourselves.”” The less interference from government the better, let the people be, truthful people who believed in freedom have understood this forever. What is the invisible hand, the invisible hand is the people, the people will set the prices, that is all the invisible hand is, the actions of the people.
[My emphasis]

Note the last sentence:

What is the invisible hand, the invisible hand is the people, the people will set the prices, that is all the invisible hand is, the actions of the people.’

Brilliant. What insight! Bhekuzulu Khumalo is absolutely right and he states the proper meaning of Adam Smith’s use of the metaphor of ‘an invisible hand’ in Wealth of Nations (and his prior use of it in Moral Sentiments).

Why can’t modern economists trained in the finest schools by the finest tutors and published in the finest journals and approved by the finest academic referees get Adam Smith’s use of the metaphor correct?

What is it about the metaphor that made three Nobel prize winners turn it into ‘The profoundest observation of Smith’ (Arrow, K. 1987. ‘Economic Theory and the Hypothesis of Rationality’ in The New Palgrave: a dictionary of economics, Macmillan, London); ‘surely the most important contribution [of] economic thought’ (Arrow, K. and Hahn, F. 1971. General Competitive Analysis, p 1, Holden-Day, San Francisco); and ‘one of the great ideas of history and one of the most influential’ ( Tobin, J. 1992. ‘The Invisible Hand in Modern Microeconomics’, in M. Fry, ed. Adam Smith’s Legacy: his place in the development of modern economics, Routledge, London)?

How did Adam Smith’s casual metaphor achieve such high status when neither he nor contemporary readers noticed it? Why is that the unknown (to me, at least) Bhekuzulu Khumalo points out what is obvious to a few others (including myself: ‘Adam Smith and the Myth of the Invisible Hand’, 2007, and posts of Lost Legacy, passim: available from Lost Legacy: that people’s decisions, following the basic laws of economics, are guided by their preferences, risk aversions, and supply and demand?

As Bhekuzulu Khumalo puts it so well: ‘people have understood economics long before meeting with the white men, people have always understood that the price of grains rises in a drought, the value of cattle rises with droughts as they become fewer and therefore more precious, people have understood this fact for thousands of years’.

There are no disembodied and invisible hands, ghosts, spirits, gods and fairies at work. Markets do not need mystified. They were not invented by capitalism in the 19th century (as argued unconvincingly by Karl Polanyi in his much lauded book, The Great Transformation, 1944); they go way back ten or more millennia.

It is such a breath of fresh air from Bhekuzulu Khumalo that I am awarding him the Adam Smith Lost Legacy Prize for May and, in recognition of his outstanding understanding of the much misunderstood metaphor, I will add to the normal prize, an oak-leaf cluster.

Sunday, May 11, 2008

The Talmud on the Division of Labour

An interesting snippet from Freakonomics (9 May) HERE: from “Specialization Not as Recent as You May Think” by Stephen Dubner, suggesting an interesting insight in the Balbylonian Talmud:

But is specialization really the culprit — or, more pointedly, is specialization as modern a concept as is commonly thought? Consider this passage from the Babylonian Talmud (Tractate Berachot 58a), which predates Smith’s tale of the pin factory by some 1,500 years:

Ben Zoma once saw a crowd on one of the steps of the Temple Mount. He said, Blessed is He that discerneth secrets, and blessed is He who has created all these to serve me. [For] he used to say: What labours Adam had to carry out before he obtained bread to eat! He ploughed, he sowed, he reaped, he bound [the sheaves], he threshed and winnowed and selected the ears, he ground [them], and sifted [the flour], he kneaded and baked, and then at last he ate; whereas I get up, and find all these things done for me.

And how many labours Adam had to carry out before he obtained a garment to wear! He had to shear, wash [the wool], comb it, spin it, and weave it, and then at last he obtained a garment to wear; whereas I get up and find all these things done for me. All kinds of craftsmen come early to the door of my house, and I rise in the morning and find all these before me

Adam Smith was not, and never claimed to be, the discoverer of the division of labour, a well known phenonmenon by mid-18th century, nor did he claim the pin factory example as his own - though he did visit a pin factory where he saw 10 labourers undertaking the divided tasks, as he reports in Wealth Of Nationson p.15. Examples of pin factories in France, and accounts of them were already published by French authors, before and contemporary with him. In the Lost Legacy archives there is an account of these debates.

A Free Download of Adam Smith on the Mercantile System'

I find little gems from all over the Internet and this one looks promising.
Adam Smith, On the Mercantile System, (18 pages) comes from WOWIO Books, of which publisher I know nothing.

The product is described as:

For Adam Smith a nation state was simply the total of the people in it; the state’s wealth was drawn from the labor of its individuals as well as from its natural resources.

In Book IV of his 1776 “Wealth of Nations,” Smith argues for free trade and introduces the notion that many individuals, acting out of their perceived self-interest, are “led by an invisible hand” to promote an end which was not part of their intention. That end generally benefits society as well as individuals, reasons Smith.

This selection shows Smith discrediting the popularly held belief of the 16th-18th centuries that a nation state’s wealth was measured in treasure and bullion and, consequently, state regulation of foreign trade was required to assure a surplus of exports over imports

WOWIO books are free downloads to readers located in the USA and US citizens in the military or government abroad.

I have not read this product but the extracts appear to be from Book IV of Wealth Of Nations and more people should download this (better still, read the entire original chapter) publication.

Book IV is the core of what Adam Smith was doing in writing Wealth Of Nations, which was not an economics textbook by any stretch of the meaning of the term. It was a critique of ‘mercantile political economy’ – a ‘very violent critique’ was how Adam Smith described it – as practised by Britain since the 16th century.

It wasn’t written for fellow political economists; there were not that many of them around, certainly not enough to justify the number of copies such a group were likely to buy. Smith’s target audience were British legislators and the people who influence them, including those coming to prominence in the British colonies of North America (he regarded the mercantile colonists and shareholders with the East India Company as a lost cause).

I don’t agree with the description that ‘the state’s wealth was drawn from the labor of its individuals as well as from its natural resources’. This ignores the significant multi-factor commercial economy, consisting of the rent charged for the use of land and purchase of natural resources and the crucial factor of the owners of capital-stock who finance the advances to the labourers, and without which there would be no product to count among the annual output of ‘the necessaries, convenience, and amusements of life’.

Restricting it to the ‘labour of its individuals’ and ‘natural resources’, without making clear the roles of the other contributors, the other property owners, detracts from Adam Smith’s analysis. He did not consider that labour was the sole source of product; necessary, yes, but alone, no.

I have the usual problem with the ‘notion that many individuals, acting out of their perceived self-interest, are “led by an invisible hand” to promote an end which was not part of their intention’, as if this is of the significance granted it in the 20th century (and well rehearsed on Lost Legacy).

The ‘invisible hand’ was a metaphor, not a ‘notion’, not a ‘concept’, not a ‘theory’, not a ‘principle’, and nor a ‘paradigm’. He used it only once in Wealth Of Nations and Book IV and not in Books I and II where he discusses the workings of markets, along with his core principles (propensity to truck, barter, and exchange; division of labour and specialisation; self-betterment; natural and market prices’; savings and investment; prodigality and frugality; competition and monopoly; spread of opulence and the liberal wages of labour). But not a sight of the metaphor so strongly associated with his name.

However, if the product from WOWIO Books consists of extracts from Wealth Of Nations and not edited commentaries on them, it would have value for introducing Adam Smith’s ideas to people who may only have heard accounts of them.

As its free, and only 18 pages, readers in the US are advised to invest a few minutes downloading it.

Measured Rage Amidst Opulence

Natasha’ in Pacific Views (10 May) writes a brief history of energy from the single cell of several billion years ago to modern the recent phenomenon of capitalism (US version or, rather, its Californian vision), entitled: Global Suicide Pact: The Efficiency Trap (HERE)

Some extracts: “Energy, fuel and materials, often symbolized by money, but always coming back to a basic capacity to do work, is supposed to flow towards fewer and fewer hands to be efficient in the modern capitalist sense. In living systems, it's supposed to flow through ever more hands, getting trapped and held at every level for the work of powering all sorts of life processes, but never held permanently.

A lion, for example, concentrates a lot of energy and nutrients, but at some point it releases them back down the chain, which allows living things other than lions, and less efficient at trapping energy, to flourish. That's good for the lions, because otherwise they'd eventually run out of food. You see how it is.
Modern economies are structured with the goal of efficiently reducing the energy stored at every stage to produce large concentrations of wealth that are not released for other processes. Ecosystems are structured with the goal of storing energy (i.e., wealth) across as many structures and in as many hands as possible in case ... well, there's always an 'in case
.' ”

...“There are climate changes, disease epidemics, natural disasters, damaging mutations, droughts, famines, all kinds of problems that are unpredictable but come around over and over again with a certainty. Living systems that are diverse and superficially inefficient, where at every stage there's enough energy to maintain a flourishing bounty of living beings, ensure the greatest chance of survival of at least some of them. On the other hand, in ecosystems where one species has over-concentrated energy to the detriment of all the others, a change in circumstance can be far more destructive than it might have been otherwise.
It's actively inimical to life. Also, an indication of a floundering economy, as Adam Smith himself noted in Wealth of Nations:

‘The liberal reward of labour, therefore, ... is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards.

…."The Original Purchase-Money"

“From the beginning of industrialization, when it became possible to super-concentrate more wealth than ever before, humans have been rapidly displacing other chemical machines. We consume nearly 40% of the primary productivity, (that energy captured into living things and stored as carbon compounds,) of the entire planet.
There are now fewer kinds of things that don't stay where they're put. Fewer kinds of things that can take energy and make something more fun happen with it than the production of waste heat. Again, that sounds like an increase in the boredom quotient to me. And I so hate that!

We've increased the efficiency of the process of nutrient and energy flow on the planet. It goes from the sun, to a plant, maybe to an animal that eats that plant, and onto our dinner tables or into our consumer goods chain, then ... waste heat. Then, the loss of the nutrients fixed by that energy to the ocean, or a waste dump, or the atmosphere.

We're starving our fellow species out and impoverishing ourselves in the process.
Because there's always as much dead matter as there ever was. Matter, the base chemical components of the universe, can neither be created nor destroyed. There aren't always more living, chemical machines; with their quirky operating instructions, engineering creativity, inefficiency, and autonomous motion. Machines that can do truly interesting work and ... remember that we're talking about the capacity to do work, right? Adam Smith, once more from Wealth of Nations:
Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who posses it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.

There is nothing that so distinguishes the Earth from sweltering Venus, or from the frigid mineral opulence of the asteroid belt, as the laboring life that it harbors.”
“Simple enough, it seems the goal is, that an illiterate child working for $0.25 an hour could run it from a sweatshop, with the sole intent of her employers being to afford another dead yacht.

Simplify, simplify, simplify. This is the call of the clockwork culture. Simplifying everything, not to free energy to sustain a greater wealth of life. No. To put everything within reach of ever simpler processes, and then use those processes to support ever fewer beings with ever greater energy.”

Natasha’s theme and its implications are highlighted, ironically, by Pacific Views’ mast heading, a quote from Malcolm X:

‘You’ve been had. You’ve been took. You’ve been hoodwinked, bamboozled, led astray, run amok.

There is a flaw running through her analysis of modern capitalism (her science is probably sound; sort of mood music, perhaps).

She confuses the role of ‘wealth’, a not uncommon problem, against which Adam Smith had plenty to say. I am minded of his parable of the rich landlord surveying all his fields and what grew on them – ‘mine, all mine’, he thought as he salivated, but, noted Adam Smith, it ain’t quite what it seems:

Our imagination, which in pain and sorrow seems to be confined and cooped up within our own persons, in times of ease and prosperity expands itself to every thing around us. We are then charmed with the beauty of that accommodation which reigns in the palaces and oeconomy of the great; and admire how every thing is adapted to promote their ease, to prevent their wants, to gratify their wishes, and to amuse and entertain their most frivolous desires. If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.” (Moral Sentiments, IV.1.9-10: pp 183-85)

Natasha sees the system she lives in as being about:

“Energy, fuel and materials, often symbolized by money, but always coming back to a basic capacity to do work, is supposed to flow towards fewer and fewer hands to be efficient in the modern capitalist sense” (emphasis added).

She confuses ownership in the legal system with consumption of the total income flow, which has to pass through the hands of thousands, nay, millions, because profits are always a smaller proportion of the total flow and are owned by fewer people (shareholders and those who own the institutions.

What is earned is not necessarily consumed. Even the richest billionaires of India (let alone those in the US) consume less than the total incomes of the vast mass of impoverished others – Natasha confuses gross inequalities of means with total income flows.

Hence, her statement that “it seems the goal is, that an illiterate child working for $0.25 an hour could run it from a sweatshop, with the sole intent of her employers being to afford another dead yacht” is striking, as journalism read mainly, if not exclusively, by people in the USA, themselves opulent by any standards across the world, and certainly more so than any previous age of subsistence since humans left Africa millennia.

But is she close to ‘hoodwinking’ herself?

Consider, the lives of kids working for 25 cents an hour, $3 a day, in what Adam Smith called the great ‘operose machine’ of commerce, now capitalism, the guilty party in Natasha’s view for the ills which she highlights, compared to their alternative (real not imagined in some mind state of the world that has never, yet, existed).

Smith said it is a ‘deception’ that drives some people to aspire to ‘another yacht’ or such like, but the deception ‘employs thousands’, at the very top, hundreds of thousands, directly and millions indirectly.

The exploited labour of the ‘illiterate child’, and scores like her, helps produce the wherewithal that eventually cumulates to the price of the ‘dead yacht’, and en route to this ‘frivolous’ goal, the others who co-operate in this process ‘derive from [the rich man’s] luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice’, and more important, which in any different circumstances that are realistically imaginable (given the evidence of history), would not be produced at all.

Too often, the alternative income for the child in the reality of many places is working as rent boy or girl prostitutes (documented for many Asian countries), or for adult women working in Vietnam in big-brand factories, the alternative is 18-hour days in the fields for even less a day.

This is not to excuse or defend the life work ‘balance’ of people in developing economies; I am challenging the views of articulate authors from comfortable California, lashing out in all directions in measured rage at the vary basis of their opulence, guilt and all, perhaps mitigated by their feelings that their own privileges are minute compared to the really rich celebrities who live around them.

Adam Smith saw his role as a moral philosopher to ‘do nothing, but observe everything’. The latter is a necessary precondition for informing those who wish to do something. That was Adam Smith’s role in writing Moral Sentiments and Wealth Of Nations.

I would suggest humbly that Natasha pause in her certainties and read Adam Smith on the ‘man of system – very wise in his own conceit’ in Moral Sentiments (VI.ii.2: pp 227-34).

I doubt whether it would have an immediate affect on her passions but I hope it remains as a nagging challenge to them.

Friday, May 09, 2008

Wealth Of Nations: audio version

Timesonline(London) has a review by Christina Hardyment of an edition of The Wealth Of Nations by Adam Smith (Naxos, 6 CDs, £19.99):

Adam Smith is now the darling of the dog-eat-dog post-Keynesian economic climate, but Hugh Griffith, the abridger and introducer of Adam Smith's Wealth of Nations (Naxos, 6 CDs, £19.99, offer £17.99 inc p&p from 0870 1608080 or is frank about the difficulties of the legendary 1776 roadmap of market economics. “Like Marx's Capital, it is long, tough and of those eternal classics of human thought that hardly anyone reads”.

He is, however, persuasive about its virtues: “The hallmark of genius is not constructing things that are complex but seeing the significance of things that are simple”. As soon as the listener gets past the daunting table of contents, Smith's genius for vivid phrases and everyday examples becomes apparent. “The real price of everything is the toil and trouble of acquiring it.’

Audio books are not new; markets have been created for them but an audio version of Wealth Of Nations is something new to me – markets provide experiments in everything possible and consumers decide which work and which bomb.

The selling pitch for Hugh Griffith’s abridged and introduced edition of Wealth Of Nations begins with the ‘fear’ factor of it being ‘long, tough and dense’ (even supposed professional economists complain about that, though it is a gross exaggeration) followed by a piece about is ‘genius for vivid phrases and everyday examples’ which is the hook to draw listeners to part with ‘£19.99’ for six CDs.

I bet they will sell far more (no matter how much they sell) than purchasers will actually listen to what they’ve bought. But at £19.99 for an abridgement – that is once they get ‘past the daunting table of contents’ which must be like listening to paint drying (who does other than scan a table of contents?) – its practically expendable money and worth the risk. Better still, by it as a gift for somebody else.

Incidentally, nothing is like the first part of Karl Marx’s Capital, written, my tutor told me, when Marx was suffering from carbuncles, though years later I realised it was obscurely boring because it was nonsense dressed as science, which only got worse the deeper you read into volumes I to III, until Marx dropped his excruciating labour theory of value towards the end, making all the effort a waste of time and brain cells. Volume IV on ‘surplus value’ is an (unreliable) essay on early economic thinking.

Well a review is a review, and it The Times too. I wonder if it wil make the Times Literary Supplement?

Adam Smith Was Not a Precursor of Karl Marx

It’s always pleasing to read letters in the Scottish press from residents debating some of the ideas of Adam Smith from people who appear to have read his works.

Two recent correspondents are Ellis Thorpe (Inverurie, Aberdeenshire) (‘I prefer Adam Smith's idea – tax on what I spend, so what I do pay is "little by little" and how much I pay is my own responsibility', Evening News, 28 April), and Alan Murphy (Edinburgh) (‘Adam Smith's classic Wealth of Nations certainly has something to teach us about taxation (Letters, 29 April). But he did not advocate taxes on spending. He saw them as unfair for the same reasons Ellis Thorpe approves of them: consumption does not always match income; the parsimonious can avoid paying. Worse still, those who live in another country to their source of revenue escape completely.’).

The background, briefly, is that in Scotland there is a debate over the Scottish National Party’s election proposal, which it is trying to implement now that it forms the newly elected Scottish Government in the Edinburgh Parliament, to abolish the local ‘Council Tax’ and replace it with a new local income tax.

The minutia of the political controversy, now in the muted rage stage, would take us beyond the remit of Lost Legacy (and probably beyond the attention spans of our readers), but I would like to comment on one of the statements made by one of the disputants now exchanging carefully aimed (and uniquely brief) arguments they are mustering in the Scottish press.

Alan Murphy writes:

The pioneer of modern economics is often regarded as the patron saint of capitalism. Read him carefully and you may find a precursor of Karl Marx.”

Not knowing either gentleman – though I confess to having exchanged letters in The Scotsman from time to time with Ellis Thorpe on his views on Adam Smith, but not recently – it is not clear how solid is Alan Murphy’s knowledge of Adam Smith to make his assertion though he advises Ellis Thorpe to ‘read him carefully’.

Without knowing for sure, I would have thought it likely that Ellis Thorpe would be inclined to have a view on the assertion because he stood as a Labour Party candidate for the Scottish Parliament in 2003.

But Alan Murphy’s assertion can be taken several ways, either as a ‘tease’ to a Labour Party member (whom I agree has expressed not entirely ‘warm’ views about Adam Smith in correspondence with me, suggesting that Smith was a ‘bosses’ man’), or as a serious observation about Adam Smith as a ‘precursor’ (a ‘forerunner, herald or harbinger’) of Karl Marx.

The latter view, as a ‘precursor’ could be consequential or trivial: Adam Smith as ‘John the Baptist’ to Karl Marx (a monstrous libel), or Adam Smith among several other early economists that Karl Marx read, summarised, sifted through, and selected from, to draw up his unique blend of economics, political fantasy and future prospects.

I am writing a paper at present, to be presented to the History of Economic Thought conference this coming September in Edinburgh, entitled: ‘Adam Smith and the Labour Theory of Value’, which disposes of the common view among modern economists (few of whom read his works) that Adam Smith had a labour theory of value.

This decidedly breaks the widely proclaimed link between Adam Smith and Ricardo (who did have a labour theory of value) and Karl Marx, who turned it into a religion.

Adam Smith’s views on the ‘liberal reward of high wages’ and its role in ‘spreading opulence’ among the labouring poor and their families was based on ‘equity’ (what is only fair) and the ability of a growing commercial economy to pay higher wages as the demand for labour increased from the growth of an economy.

An opulent economy was characterised by low profit rates (but larger total profits from a larger total annual output of the ‘necessaries, conveniences, and amusements of life’, or GDP) and higher wages above basic subsistence (from the increased demand for labour in a growing economy).

This prospect contrasts with Karl Marx and his expectations of growing immiseration of labour, both those employed and in the unemployed reserve army of labour, all beset by the increased frequency of depressions.

Having read Adam Smith carefully, I do not concur with Alan Murphy’s assertion that he was a precursor of Karl Marx.


Thursday, May 08, 2008

If Denmark is a special case it has nothing to do with invisible hands

Tim Worstall, a prolific Blogger in his own right (HERE), a contributor to several other Blogs, and also a co-Fellow of the Adam Smith Institute (London), picks up on a brief extract of 500 words out of over 5,000 words) from a researched article in Foreign Affairs (March/April 2008) (HERE):

The Copenhagen Consensus: “Reading Adam Smith in Denmark” by Robert Kuttner (Co-Editor of The American Prospect, a Senior Fellow at the think tank Demos, and the author of The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity. He conducted the research for his article as a German Marshall Fund Journalism Fellow):

Summary: Denmark has forged a social and economic model that couples the best of the free market with the best of the welfare state, transcending tradeoffs between dynamism and security, efficiency and equality. Other countries may not be able to simply copy the Danish model of social democracy, but it nonetheless offers important lessons for governments confronting the dilemmas of globalization.

Adam Smith observed in 1776 that economies work best when governments keep their clumsy thumbs off the free market's "invisible hand." Two generations later, in 1817, the British economist David Ricardo extended Smith's insights to global trade. Just as market forces lead to the right price and quantity of products domestically, Ricardo argued, free foreign trade optimizes economic outcomes internationally.

Reading Adam Smith in Copenhagen -- the center of the small, open, and highly successful Danish economy -- is a kind of out-of-body experience. On the one hand, the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Does Denmark have some secret formula that combines the best of Adam Smith with the best of the welfare state? Is there something culturally unique about the open-minded Danes? Can a model like the Danish one survive as a social democratic island in a turbulent sea of globalization, where unregulated markets tend to swamp mixed economic systems? What does Denmark have to teach the rest of the industrial world?

These questions brought me to Copenhagen for a series of interviews in 2007 for a book I am writing on globalization and the welfare state. The answers are complex and often counterintuitive. With appropriate caveats, Danish ideas can indeed be instructive for other nations grappling with the enduring dilemma of how to reconcile market dynamism with social and personal security. Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

At the center of the current Danish model is a labor-market strategy known as flexicurity. The idea is to reconcile job flexibility with employment security. The welfare state is often associated with rigid job protections: laws and union contracts ...”.

This looks like a most interesting article and is part of the perennial debate we have in modern capitalist societies about the private-public balance in our economies.

Capitalism comes in several forms (among which are: Anglo-American, Continental Europe and its Scandinavian sub-set, Asian Tiger, (‘ex’)Communist State Capitalist, Latin American State Capitalist, Oil-based Capitalist, and African failing state capitalist) and I doubt if any one of them could be picked out as conforming to the commercial society of which Adam Smith wrote about, en passant of his critique of British mercantile political economy in Wealth Of Nations.

Adam Smith did not criticise the role of government as such (that’s a 19th century fiction) and a misreading or, more likely, a non-reading of Wealth Of Nations. He made specific criticisms (he called it a ‘violent attack on the commercial system’) applied to the specific set of circumstances of Britain in mid-18th century (which circumstances persisted into the 19th century and to some extent re-surfaced in the 20th century and are still with us).

Smith expressed no views about the future of the commercial economies he knew about, which creates today’s confusion, primarily on the ‘Right’, about how Smith’s ‘ideal’ economy may have looked. The more extreme of them (the ‘anarcho-libertarians’) strip out his specific criticisms of how mercantile states intervene in their economies, re-cast whole sentences as if they refer to corporate capitalism, and lump all and any state expenditures, beyond the main headings discussed in Book V of Wealth Of Nations (defence, justice, limited public works and institutions, education and the ‘dignity of the sovereign’), as unwelcome and improper. Advocates of cutting back on that list deeper inhabit their wilder shores.

The opposite mistake that some make (primarily on the ‘Left’) is to find in his
writings in minute selections from them support for their claim that justifies a ‘social democratic’ interpretation of how a commercial economy should work. They also re-cast whole sentences as if they refer to corporate capitalism and the normal behaviours of modern businesses (for example, Smith’s staunch critique of the East India Company is transformed into a critique of modern corporate structures, and his paragraphs on the iniquities of local Guild monopolies from the 16th century onwards are portrayed as applying today).

Adam Smith was circumspect about the positive reforms he encouraged, such as equity justifying ‘liberal’, i.e., ‘higher, wages for the mass of the labouring poor, but whether this can be stretched to the social-democratic Scandinavian model is more than a little disingenuous. In Smith’s time, and from long before, redistribution of income was not advocated nor agenda. All modern states redistribute income to some extent with varying results. The Scandinavian model is so far confined to capitalist economies with small populations, a much more manageable political consensus than the major European and North American capitalist economies.

When Robert Kuttner writes: ‘Adam Smith observed in 1776 that economies work best when governments keep their clumsy thumbs off the free market's "invisible hand." ’ he takes liberty with what Adam Smith actually wrote, as regular readers of Lost Legacy should know well. The mercantile British economy was lop-sided in the dependence of its economy on its North American colonies.

Too much capital was diverted to its trade monopoly to and from the colonies, because of higher profits to cover the risks of long distance and round-about trade. The Cromwellian Navigation Acts enforced that monopoly, which was protected by prolonged and expensive wars with European neighbours that diverted capital from investment via government taxation and borrowing. The Seven-Years war (1756-63) cost British taxpayers £175 million which otherwise could have been invested in domestic industry.

The so-called ‘invisible hand’ metaphor in Book IV was about the risk avoidance of some British traders who invested in the lower-risk (because better known) local trade in preference to the higher risks of foreign trade (but which many compatriots were willing to risk for the higher profits) and the consequences of the decisions of the traders. Adam Smith explains this clearly before he mentions the metaphor of ‘an invisible hand’ supposedly guiding those who invest locally into contributing their capital to the total of the nation’s capital and by doing so they ensure that domestic capital is larger than it would be if they behaved differently by investing abroad.

Not all of Adam Smith’s readers were well educated in political economy and he used the metaphor (the only time he did so in Wealth Of Nations: see WN IV.ii.9: p 456) to support his explanation for the general reader (aristocratic legislators and those who influenced them). Basically, his point was the arithmetical whole is the sum of its parts: increase the number and the size of the parts and the whole is consequentially larger than it would be with fewer and smaller parts.

Modern economists understand his explanation but somehow credit the isolated metaphor with mystical content – a disembodied body part – when literary readers in the 18th century would recognise the metaphor from its widespread use in other contexts by other authors.

Be clear, the invisible hand was not a ‘theory’ and neither did it have anything to do with Adam Smith’s analysis of markets (fully discussed in Books I and II of Wealth Of Nations). Indeed, in Books I and II Adam Smith provides over 50 instances of self-interested actions in which the outcomes were bereft of being beneficial for society.

Interestingly, he did not mention ‘invisible hands’ in any connection with the working of markets, nor did he mention it when he identified the ‘clumsy thumbs’ of government intervening in the economy anywhere in Wealth Of Nations.

Strange, for a ‘theory’, or rather the ‘fiction’, that he did not do so.