Thursday, July 31, 2008

A Correspondent Writes...

A correspondent writes:

I find Smith difficult, because after 800 pages extolling the virtues of free exchange and how bad the politicians are, he suddenly starts to suggest various public spending programmes. Justifiable if they, so to speak, lay down the highway along which commerce can travel, and make the process more efficient. Though a thoroughgoing free-marketeer might say that the market would do that itself - entrepreneurs would realize that new roads or bridges are needed, and build them, and find innovative ways of charging for them. Of course, Smith says that those who get most gain should do most of the paying, so that helps assuage the thoroughgoers a bit. But his ideas on education, with the public paying for builders but not, of course, for good reasons of incentives, the teachers, seem rathe woolly.”

Book V of Wealth Of Nations does seem to stand out from Books I-IV. It is, however, foreshadowed by his continual references to the misbehaviour of certain of the ‘merchants and manufacturers’ who leap at the first opportunity they get to ‘fix’ markets for their selfish interests by widening them with more customers and simultaneously narrowing the competition by monopolies and protection, to raise prices and enrich themselves as they lower the real incomes of consumers and narrow their choices.

Book V is about the duties of government which raises its finance by taxation, duties and borrowing. Let’s always start from the proposition that government spends our money not theirs. In the modern era it discovered yet more sources of increasing its funds, of which income tax was the most obvious, yet by no means then the most odious and dangerous. Government borrowing, bonds, and sinking funds (often spent on them accumulating, rather than used to clear government debts) was of lasting economic damage.

The need for such increased sources of funds was often occasioned by sudden needs to mobilise armed forces (army and navy) not usually to fight off invasion threats – the first duty of government – but to initiate military force against neighbouring trading partners in exhibitions of what David Hume called ‘jealousy of trade’, or to subsidise continental absolute monarchs who were (temporarily) friendly to Britain.

So, lets see Adam Smith’s advice to invest capital in projects that facilitated commerce (roads, canals, docks, and such like) and in public institutions that supported justice – popular knowledge that would replace illiteracy and ignorance, and potential ‘enthusiasm’, or wild disturbances of society. A belief that there were individuals around who commanded the vast sums needed for road building who were motivated by ‘free enterprise’ in mid-18th-century Britain is an exaggeration.

His schools programme was an attempt to lay the basis for universal education, at least for boys, that would benefit commerce (reading, writing and account, plus a little geometry) – even using a gaunt tale of factory work to frighten the middle class readers and upper class influencers into building a barrier against subversion by supporting the modest expenditures required. It was a better use of public money that £170 million spent on the Seven Years War. Smith even found a use for government combating ‘loathsome diseases like leprosy’ – again more socially useful that millions wasted elsewhere.

Smith was not an ideologue; he was pragmatic: which system of organisation and finance worked best: public funding with public commissioners or public funding with private companies?

The choice of independent free market subscribers required resort to the vehicle of Royal Chartered Joint Stock trading companies, awarded monopoly rights. There was not enough private capital around, or at least insufficient mechanisms for assembling them – that came later and was beyond Smith’s remit in Wealth Of Nations.

Today, the same battles need to be thought, especially with the state sector grown to incomparable heights, and taxation of our money on an unprecedented scale – not just income tax, but also value added tax; not just taxation of profits but also taxation of capital – and the spending agenda is not just foreign wars but also spending into every nook and cranny of private behaviour.

Today, Radio 5 discussed another government agency to tell parents what games their children should play and another idea was offered that suggested an ‘independent’ agency should decide what the police can do with the DNA records – neither will be cheap to implement, of course, and neither will resolve the problems they are set up to deal with.

There is a lot of work to do to roll back the ever expanding public control of how we live.

When Talking Turkey is Talking Nonsense

Wayne Dowler (Department of Humanities, University of Toronto), writes in the Globe and Mail, Canada (31 July) HERE:

“Talking turkey”

According to your article India Nixes WTO Deal To Cut Tariffs (Report on Business, July 30), the chairman of the Canadian Turkey Marketing Agency says the World Trade Organization talks "didn't seem to be favouring our interests so I guess no deal is better than a bad deal." Adam Smith sure got it wrong. Of course the interests of producers trump the interests of consumers. Now that that comparative advantage is comparatively much less advantageous to Western producers, the old Corn Laws - well, massive subsidies to cotton producers and the like in the U.S. and supply management in Canada - look pretty good.

Still, Western negotiators will keep right on invoking Smith's free-trade principles to put those tariff-loving developing nations in their place.

I am not clear where Wayne Dowler gets the idea that Adam Smith “sure got it wrong”?

Is Wayne Dowler, an academic at the prestigious University of Toronto asserting that Smith said “the interests of producers trump the interests of consumers.” What exactly is he saying?

Is it that Smith said producers didn’t ‘trump the interests of consumers’ or that if he didn’t say that, he should have?

Reading what Adam Smith did say doesn’t help me understand the allegation made by Wayne Dowler:

Consumption is the sole end and purpose of production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting the interests of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.’ (WN IV.viii.49: p 660)

It seems to me that Adam Smith was perfectly correct and his comments are remarkably apt for explaining the remarks by the chairman of the Canadian Turkey Marketing Agency.

Being a publicist for the turkey producers (at least those that join the agency representing them), he is putting a good spin on the failure of the WTO round to remove tariffs, presumably on turkey meat, by looking at, for him and his members, the status quo has being better than reform which would benefit consumers by lowering the price of turkeys and simultaneously raising their real incomes".

I fail to see how ‘Smith's free-trade principles’, as understood by Smith, can be used ‘to put those tariff-loving developing nations in their place’.

The US, Canada and the EU are not ‘free trader’ economies at all. In agriculture particularly, of which turkeys are a part, they are protectionist in the worst mercantile tradition of 18th-century Britain.

Wednesday, July 30, 2008

Quoting a Dodgy Source About Adam Smith Does No Favours to an Author's Assertions

Hardly a day goes by without somebody waxing lyrical about what Adam Smith means by the metaphor of 'an invisible hand' and from their misunderstanding making a case for this or that observation of modern economies. Hardly a day goes by without me responding to their views in

F.D. Zigler writes in MoneyThoughts Blog HERE:

"A Visible Hand Is Needed

Invisible hand is the term used by Adam Smith to describe the natural force that guides free market capitalism through competition for scarce resources. According to Adam Smith, in a free market each participant will try to maximize self-interest, and the interaction of market participants, leading to exchange of goods and services, enables each participant to be better off than when simply producing for himself/herself. He further said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this "invisible hand" would guide market participants to trade in the most mutually beneficial manner

Adam Smith (baptized June 16, 1723 – July 17, 1790 [OS: June 5, 1723 – July 17, 1790]) was a Scottish moral philosopher and a pioneering political economist. One of the key figures of the intellectual movement known as the Scottish Enlightenment, he is known primarily as the author of two treatises: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations, commonly known as The Wealth of Nations (1776). Smith is also known for his explanation of how rational self-interest and competition, operating in a social framework which ultimately depends on adherence to moral obligations, can lead to economic well-being and prosperity. His work helped to create the modern academic discipline of economics and provided one of the best-known rationales for free trade. He is widely acknowledged as the "father of economics".

The above two paragraphs I borrowed to make a point. Adam Smith was a Scottish moral philosopher who lived in the 18th century and never saw the likes of Wall Street. Had Adam Smith lived to see what technology has permitted markets to do today, I seriously doubt that he would have insisted that no regulation was necessary because an “invisible hand” would guide market players to trade in the most mutually beneficial manner.

It is my opinion, that if Adam Smith could come back and see how the capital markets operate today, and given the size of the markets today, that he would say it is time for the “invisible hand” to become visible.”

The main problem with the author’s ‘borrowed’ two paragraphs is that they do not represent anything like what Adam Smith said either about invisible hands or commercial markets.

The arrival at ‘rational self interest’, and ‘an “invisible hand” [that] would guide market players to trade in the most mutually beneficial manner is mythical to say the least, and was invented by mid-20th-century economists to add a respectable gloss or aura to their eloquent mathetmatical models (no people!) of general equilibrium (which, of course, bore no resemblance to the real world).

Those interested in the genesis of Adam Smith’s use of the metaphor an invisible hand on the two occasions he referred to it, once each in Moral Sentiments and Wealth Of Nations (his single use in the History of Astronomy paper had nothing to do with economics, let alone markets: it was a pagan 'pusillanimous superstitition'), may obtain a copy of my paper: ‘Adam Smith and the invisible hand: from metaphor to myth’ by introducing themselves and mailing me ‘gavinaTnegwebDoTcom or may scroll through the archives here in Lost Legacy and selected any of a hundred posts on the subject,

These facts make redundant what Adam Smith would think of Wall Street today, especially if you start from the wrong premiss.

Oh, and by the way, Adam Smith was NOT 'baptized June 16, 1723'; he was baptised on 5 June 1723. Why the dodgy source used by F.D. Zigler, should have any credibility for the meaning of the invisible hand metaphor when it gets such a simple and well known fact wrong, raises questions as to why he quotes from it.

No Return to Equality

I sometimes receive correspondence from readers off the blog, so to speak, and a recent one picks up on Monday’s piece about free markets v. capitalism. I don’t think capitalism needs much defending it - clearly it works overall.

Nor do I buy the ‘inequality’ complaint, as if this is something new and associated uniquely with modern capitalism. It began with the first steps away from the ‘1st Age of Hunting’ when some humans discovered the institution of property by excluding outsiders from their pasture land in the ‘2nd Age of Shepherding’ (they preferred to fence their livestock from wandering away or outsiders from wandering in and helping themselves to the livestock). In time, other humans applied the institution of property to the ‘3rd Age of Agriculture’, preferring to fence their fields off from wandering livestock eating the crops and outsiders trampling over the crops.

These developments created inequality. Those who were part of the insider groups – those who led them and those who worked for the leaders – lived better than those who didn’t and those who stuck with hunting in the shrinking territory unclaimed by the property owners or too distant to be reached (that is, outside the Mediterranean and Western European lands; and later in the East across the Asian continents).

The rest of the world remained in totally equal societies and economies, that didn’t change much until the property-owning societies ‘found’ them in the geographical explorations from the 15th century onwards. As Smith noted the gap between the poorest labourer and the prince in 18th century Britain was much smaller than the gap between the poorest labourers and the ‘savage’ princes on North America and Africa (Wealth Of Nations, WN I.i.11: p 23-24) The reason was in the advanced division of labour in the unequal 4th Age of Commerce then emerging fairly rapidly from the great disruptions after the fall of the western Roman Empire nearly a thousand years earlier.

Some evince a desire to return to the ‘simpler’ life of nature of those previous equal societies, though quickly modify their desires once they realise what they would have to give up just to reach their simple-life goals. Not only would all the elements of modern society (good and bad) be absent but they would have somehow to revert to the knowledge needed to exist solely within the bounds set by nature, and, crucially, the population levels sustainable by what was available for the equal basics of food, coverings, and shelter, i.e., not six billion but something less than a hundred million, may be fewer.

Fine, if you and your descendants are among those not eliminated in the largest world genocide ever contemplated; but if not, then within a short time. Happy hunting. Of course, you first have to persuade everybody else to choose suicide and leave the planet to you. Good luck.


Monday, July 28, 2008

Markets versus Capitalism?

Is there something different to debate when considering a market economy and a capitalist economy? This is the question posed by Tim Worstall on the Adam Smith Institute’s Blog this morning (HERE).

Tim asks the question because he is discussing: ‘Comparing the Costs of Communism’, using Finland and Estonia as the cases for study, because they were quite similar in their living standards in 1939 and 50 years later in 1994 they weren’t; Estonia for much of the 50 years had been a Soviet satellite and occupied country with all the trappings of a communist command economy, and Finland, while living under the shadow of the Soviet Union, had ‘remained a market economy’ with, however, a fair degree of state control.

Tim Worstall writes:

But Finland was far from being a rip-roaringly capitalist economy over those years: it wasn't particularly intellectually free either, and the economy was quite closely aligned with that of the Soviet Union as well. The important point was this:
Despite close relations with the Soviet Union, Finland remained a market economy...

By leaving voluntary exchange unchecked, by having a price system that could inform on the allocation of resources, after only 50 ish years the place was creating three times as much wealth per head for the people to share than the place which did not retain those options.

I've said before here that capitalism and markets are two very different things: the former is a description of a method of ownership, the latter a description of a method of exchange. I've also said that if we were only able to retain one of the two I would unhesitatingly pick keeping the markets and capitalism can go hang. Finland during the post war years wasn't all that capitalist a place but it was indeed a market economy and the comparson here wth Estonia simply reinforces that belief of mine.’

I am often commenting on people’s assertion that Adam Smith wrote about capitalism and using the illustrative point that he never mentioned the word ‘capitalism’ as it was not invented in English until its use in 1854 by Makepeace Thackeray in his novel the Newcomes (Smith died in 1790).

Wealth Of Nations was not about capitalism; it was about a commercial economy, then prevalent in the 18th century Britain, a mainly agricultural economy (nearly 50 per cent of what we call the GDP) with shops, market stalls, small workshops, artisans of various types and skills, and manufacturing activities that were mainly driven by hand power and not steam or electric power. It had a thriving international trade but these were relatively small sailing ships, supported inland by abysmal roads and a few canals.

It was the commercial market economy that drove the country towards the spread of opulence, and Smith saw the possibilities if the existing markets were kept free of interference by politicians, who thought they knew better than the price system, and by ‘merchants and manufacturers’, who saw personal gains from widening the market, narrowing the competition and raising their prices. But despite these interferences, some dire, many minor, the inner strength of markets continued to work for economic growth.

Hence, I don’t feel the need for particular affection for modern day capitalism. I am happy to see scores of senior executives caught with their hands in the till, alongside shifty politicians, and each big fine or jail sentence imposed is a cause of celebration – justice works! – and is not a sign of the ‘system’ collapsing, nor a need for more regulation, because strong laws and a willingness to implement them is enough for a free society.

I do feel and see a need for extending and deepening markets into further aspects of society; Smith favoured public-sector funding of projects to ‘facilitate commerce’ and he was pragmatic about whether public or private sectors managed the projects, preferring to make that decision on the pragmatic grounds of which management demonstrably worked best, even experimenting with some sites (in his case toll roads) managed by ‘Public Commissioners’ and some by Private Commercial bodies and then letting performance be the judge (though it's easier to sack poor private sector performers than poor perfoming public servants). The obsession of every-size-fits all in these issues is a triumph of ideology over good sense. Let people bid to manage local public services.

So the choice between capitalism and markets is unlikely to be agenda; unfortunately the choice between state-regulated and managed economies and markets is ever present. Here, we can take sides with enthusiasm. I favour extending markets at every opportunity.

With socialism off the agenda for now (except for those from the Left buried within the ‘climate change’ consensus, for which consensus I am not enthusiastic at all), the battle lines are drawn with the job seekers among regulators, quangocracy and public commissions on one side, and the exponents of free markets on the other.

Taking the historical view, it has been ever thus since Smith’s time.

Sunday, July 27, 2008

A Blog Author 'Replies' to Lost Legacy, Sort Of ....

The author of the Blog which I commented on the other day (see Probaway – Life Hacks): ‘How Adam Smith’s invisible hand might help us avoid Doomsday’, Thursday 24 July, has ‘replied’ indirectly to my adding the full quotation from Moral Sentiments to his selected use of the first part only (HERE)

I have commented on his Blog, which comment I reproduce below:

One Response to “The little finger on Adam Smith’s invisible hand.”

1. Gavin Kennedy, on July 26th, 2008 at 11:24 pm Said:

"I think you make your case by ignoring the first sentence: “would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them?”

Smith is talking about ‘a man of humanity’ and not every single person on the planet.

He was well aware of the prevalence of selfish, even ‘rapacious’ men of inhumanity. You go further and talk about ‘most people’ as if you have interviewed ‘most people’, when clearly you have not.

You have also interpolated far too much in Smith’s use of a well-known metaphor in the 18th century of ‘an invisible hand’ (scroll down my web site for details). On [the] single occasion he used the metaphor in Wealth Of Nations he was talking about ‘risk aversion’ and the whole is the sum of its parts (hardly 'gigantic unseen, even unknown and perhaps even unknowable processes’, and on the single occasion in Moral Sentiments he referred to [the] absolutely necessary requirement that rich landlords had to feed the ‘thousands they employed’ if their fields were to be planted, tended, and harvested each season.

Your poem is interesting, but it is a poem of your mood and not reality.”

[Readers of Lost Legacy interested in my exposition of the role of the invisible hand in Adam Smith’s works may apply to me: gavinAT negwebDoTcom introducing themselves and I shall send them a file copy of my paper: 'Adam Smith and the invisible Hand: from metaphor to myth' July 2008]

Saturday, July 26, 2008

An Annual Adam Smith Festival in Edinburgh?

Eamonn Butler’s done it again, this time in our national newspaper, The Scotsman, advocating an annual festival around Adam Smith and his works, similar to the events around the unveiling of Smith’s statue on 4 July this year (also organised by the Adam Smith Institute).

By all accounts of many of those who participated in the events (including me) considered the 4 July events were a great success, and the natural thought is now circulating that Edinburgh should promote an annual Adam Smith Festival. Edinburgh already the home of one of the largest arts festivals in the world, currently about to begin, with thousands of events packed into four weeks in August in scores of simultaneous festivals of ‘high’ culture is an ideal venue for such a new festival.

The original Edinburgh Festival was held in 1947 – ‘wartime’ rationing was still in operation; I remember it well as it was around that time that I ate my first banana!

Students of modern ideas about ‘spontaneous order’ and such like, should note that the official ‘arts’ festival was accompanied, from the start by what we now call the ‘fringe' unofficalfestival, without any recognition of any kind of these early upstart performers (Scotland was more deferential of established authority in those days).

The unofficial fringe events were set up by people who simply turned up in Edinburgh, booked a hall (the City has an abundance of such venues, some of excellent quality, some not so, and not a few of them of imaginative ‘adaptations’), handed out their leaflets to passing and probably bemused tourists, among which were the serious serial, high-arts patrons, known for their ‘superior’ and serious dispositions. The less 'superior' lovers of the arts, joined by detached refugees from officialdom, soon voted with their feet to take in events from the Fringe productions along with the 'High Arts' productions.

Since 1947, the International Edinburgh Festival has grown and grown with separate but integrated festivals of Television – all the big names and tv personalities; International Books – getting bigger and bigger each year; International Science; Children’s Theatre; International Film; International Art; International Jazz and Blues festivals, plus the ever popular Military Tatoo (of which the military bands of the former eight Scottish Regiments – sadly, now just one – are ever popular with all Scots and with the many international visitors; and the ever expanding, famous ‘Fringe’ that now has 2,008 separate shows on during this coming month, up 30 per cent on last year. The Fringe keeps growing each year and arts lovers still keep coming.

The significant aspect of the mushrooming, unofficial festivals, which until relatively recently were disdainfully ‘ignored’ and kept apart from the official and publicly funded festival, was their complete lack of ‘central direction’. The 'organisers' of the Fringe facilitated rather than ran the events and did so without censorship (if your show is crap or 'beyond the pale' you won't get an audience once the daily reviws are in).

What started as poorly printed individual leaflets, has by today been developed into a 288-page colourfully printed catalogue. The Fringe is an example of the evolution of an uncoordinated, undesigned, and unintentional successful matching of outcomes to opportunities, and was recognised eventually by numerous producers of art and culture as comparable to the official Fesitval. (There are graduate theses and dissertations here waiting to be taken up by economists, sociologists, political science and anthropology students…)

So Eamonn Butler’s suggestion today is of sound practical interest. I hope it is taken up in Edinburgh. You can read his article HERE (courtesy of The Scotsman).

"Following the huge success of the unveiling events, there are calls for an annual Smith celebration – let's call it an Adam Smith Festival. A good time might be near his birthday in mid-June. (His exact birthday is unknown, though his birth was registered on 5 June, 1723. But the calendar was changed in 1752 and a few more days were added, so mid-June is about right.)

A highly successful part of the unveiling celebrations that a festival certainly should replicate was the Adam Smith Debate in the Caves, under the arches of South Bridge, Edinburgh. It was led off by former Scottish secretary Michael Forsyth, proposing that "this house would prefer to be led by an invisible hand" – against the opposition of his old political adversary Brian Wilson. It was an example of what many of us thought no longer possible: a really good-natured debate on serious issues that was both enlightening and entertaining. That makes it worth repeating: you won't see the like in Holyrood, after all.

Another highlight of the unveiling programme was the opportunity to enjoy Adam Smith's favourite food – strawberries – in his old home, Panmure House. Its new owner, the Edinburgh Business School, Heriot-Watt University, seems keen to repeat this event, too.

We will certainly stage an international dinner near the statue; and perhaps a candle-light vigil around it. But other people will have their own ideas. After all, it would not do for an Adam Smith Festival to be too rigidly planned. How much more appropriate it would be if different people's initiatives came together – as if led, indeed, by an invisible hand.

Bringing together both topics I discuss above, I find on page 180 of the Fringe Festival Catalogue of events the following:

Adam Smith – making poverty history’ from ‘The Radicals’, featured at St Mark’s artSpace, 7 Castle Terrace on 3, 10, 16, 24 August (from 5pm to 6pm):

Adam Smith! Brilliant Scottish economist? Inspiring moral philosopher? Hero or Villain? You decide after meeting with his friends, including David Hume, Benjamin Franklin and Robert Burns in this thought-provoking, vitally relevant, entertaining docudrama’ (World Premier)

Bookings to T: +44 131 226 0000; Online booking: (24 hours)

Disclosure: Neither I, nor Lost Legacy, has any commercial or personal interest in this show, nor any idea of its contents or of its quality – it’s the Fringe after all! I have booked to attend it out of interest, to be followed by a family dinner later that evening.

Friday, July 25, 2008

Just What Economics Needs, Someone Who Understands Adam Smith and Writes So Well

If you want a punchy, short piece (under 800 words) on what Adam Smith was about for colleagues, or for introducing young people to economics, then you cannot do better than pass out copies of anything written by Eamonn Butler (and his colleague, Madsen Pirie).

Today there’s an excellent example in The China Post in Tapei, Taiwan (yes, Eamonn gets around), under the headline HERE:

Adam Smith: Economics can set you free”

“The pioneer of modern economics and the most influential thinker Scotland ever produced has at last been honored in his homeland with the first public statue of him in the United Kingdom. His message of freedom has worked wherever it has been tried, but it still needs spreading further.

Adam Smith's great and practical 'An Inquiry into the Nature and Causes of the Wealth Of Nations' (1776), is one of the most influential books ever written. It transformed our understanding of economic life from an ancient to a modern form, based on a completely new understanding of how human society works.
His 10-foot classical bronze statue was unveiled on July 4 (he was a friend of American independence) on the historic Royal Mile in Edinburgh by Nobel Prize-winning economist Vernon Smith (no relation).

Before Adam Smith, people assumed that the measure of a nation's wealth was the gold and silver in its treasury. Imports were bad because this gold and silver must be given up in payment. Exports were good because these precious metals came in. Trade benefited only the seller, not the buyer, and a nation could get richer only if others got poorer.

So countries erected vast trade barriers and controls to prevent money going out of the country -- taxing imports, subsidizing exports and protecting domestic producers (as many still do, hampering the World Trade Organization's troubled Doha Round negotiations).

Over 240 years ago Smith showed this was counterproductive.

He started not with theories, but from the fact that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values the cash less than the goods it buys. That's why you buy things.
Since trade benefits both sides, said Smith, it increases our prosperity just as surely as do agriculture or manufacture. It is not gold and silver that measure a country's wealth, but the total of its production and commerce. Today we call that Gross National Product.

This blew a hole through the trade walls that had persisted for centuries. Leading politicians to read the book. They were convinced, cutting back trade restrictions and subsidies. That led to the great 19th-Century era of free trade and rising world prosperity.

Smith told politicians to get out of the way and let people trade freely: Social and economic harmony did not need to be planned from the center. It emerged naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest did not lead to chaos but -- as if guided by an "invisible hand" -- to order and concord.

All that was needed was an open society and free markets, with rules to maintain that openness and freedom. But those rules, of justice and morality, would be general and impersonal, not for the benefit of minority cliques.

It was not 'The Wealth Of Nations' which first made Smith's reputation, but a book on ethics, 'The Theory Of Moral Sentiments.' That book argues that the source of human morality is our natural sympathy for others (today we might say empathy). By seeing things from other people's point of view, we learn how best to live happily alongside them.

Some wonder how the self-interest that drives Smith's economic system can be reconciled with the sympathy that drives his ethics. But Smith understood that human nature is complex. The baker does not supply us with bread out of benevolence, but nor is it self-interest that prompts someone to dive into a river to save a drowning stranger. Self-interested human beings can -- and do -- live together, peacefully and productively.

So 'The Wealth Of Nations' is no endorsement of dog-eat-dog capitalism, as sometimes caricatured. Self-interest may drive the economy, but freedom is a force for good. Smith believes in free markets because the poor will benefit most from them. Only the rich and powerful benefit from other systems.

Now Smith dominates the main street of the city where he worked and, in 1790, died. Tourists from all over the world pose for pictures and guides use the prominent monument as a natural assembly point. Many wonder who Adam Smith was and why he deserves such prominence.

In an age when governments claim to be able to solve every problem, people will find his message refreshing: When we reject political interventionism and rely on natural liberty, we find ourselves, unintentionally but surely, in a harmonious, peaceful and efficient society

Try to get anything like that in 800 words that is readable by both lecturers teaching economics and by general readers who know nothing about Adam Smith or economics – and still keep both groups interested and informed.

Dr. Eamonn Butler is director of the Adam Smith Institute think-tank in London, which led the campaign to raise the private funds for the new statue, and he is author of 'Adam Smith -- A Primer' , Institute of Econiomic Affairs and Profile Books, London).

Disclosure: I am a Fellow of the Adam Smith Institute; ameliorating circumstance: I consider Butler's skills in explicating market-preferred economics are uniquely excellent and would deserve praise whether in ASI or elsewhere.

[All credit to The China Post for publishing such an excellent article.]

Thursday, July 24, 2008

Adam Smith on Doomsdays

I come across a mixture of articles reflecting on aspects of Adam Smith which I comment upon on Lost Legacy, but today’s example is the most unusual yet.

It appears to focus on a single consequence, ‘Doomsday’, without explaining what it is about other than leaving a long list of postings all of which incorporate Doomsday into their titles and leave the inference that we are all ‘doomed’, a bit like Private Fraser in the popular “Dads’ Army” tv comedy series. However the anonymous author does not treat it like a joke.

The author writes on his Blog, “ProbawayLife HacksHERE, and includes his photograph of Adam Smith’s Tomb complete with the author’s image above the heading:

Adam Smith's invisible hand and Charles Scamahorn's all too visible one”.

“How Adam Smith’s invisible hand might help us avoid Doomsday.”
Adam Smith (1723-1790) was one of the clearest thinkers ever produced by humanity and perhaps his method of approaching problems might help us get a grip on how to cope with this modern problem of super weapons and humanity’s current rush toward Doomsday

Then follows the famous China Earthquake report, or at least part of it, from Moral Sentiments (TMS III.3.4: pp 136-7):

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquility, as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.”
I hadn’t remembered this Adam Smith statement until this search but it’s apt and perfectly related to our Doomsday predicament because it shows clearly that if any idea no matter how momentous can not be made concrete and immediately applicable to a person’s life they will either ignore it altogether or give it a sentimental lip service and go on about their trivial affairs

As regular readers of Lost Legacy know, the Doomsday author has left out the most important part of the paragraph he has quoted:

To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.” (TMS III.3.4: p 137)

This puts a better slant on Smith’s point. I don’t know whether this makes much difference to the author’s focus on Doomsday or not, but it sure underlines Smith’s message about the decency of people (he was not a cynic).

I have found over the years, listening to people -laden literary culture, where everything get worse and there is no hope of a better future – that we are highly selective in our evidence. It’s the bits the doomsayers leave out that suggest that we are not quite heading for doomsday; more the case that we are heading for more of the same.

Wednesday, July 23, 2008

Adam Smith on Origins of Moral Senses

There is quite a buzz going round the boundaries between economics and psychology these past few years. Much neuro-research is showing interesting patters in brain activity when humans are presented with certain subjects. Tim Worstall is a major Blogger influence in Europe (he is an Englishman based in Portugal) and blogs all over the place. I am in agreement with him on most things.

Tim modestly describes himself as not an economist but displays more economics nous than many professional economists and almost all mainstream newspaper columnists, especially and typically just this week when berating serious politicians for confusing job creation with value added contributions to national incomes: employment is a cost of activity quite separate from whether it adds to welfare.
In this piece he lights upon a report about research showing that certain areas of the brain light up when children are shown selected pictures of people in pain.

Tim Worstall in Vivre la Difference Blog (23 July) HERE:

“Empathy is Hard Wired- And Adam Smith Was Right

“Interesting research here suggesting that empathy is hard wired into the human mind.
Using functional MRI scans on normal kids aged 7 to 12, researchers found the parts of the children’s brains that were activated when shown pictures of people in pain, according to findings published in the current issue of Neuropsychologia.
Study author Jean Decety, a professor in the departments of Psychology and Psychiatry at the University of Chicago, reported that empathy appears to be “hard-wired” into the brains of

“Consistent with previous functional MRI studies of pain empathy with adults, the perception of other people in pain in children was associated with increased hemodymamic activity in the neural circuits involved in the processing of firsthand experience of pain…,” Decety wrote.

… However, what sparks my interest here is that there’s really not all that much new under the sun. The father of economics as he’s often called, was Adam Smith. He’s associated these days with a rather dry form of free market loonery but that’s really not at all where he really comes from (I should add that I’m a Fellow of the Adam Smith Institute so I know whereof I speak.): he was a moral philosopher first and foremost.

For example:

To his credit, and ours, Smith thinks the species empathetic, morally disciplined, and reciprocal.
That’s not quite what we normally get from the modern economics textbooks, is it?

Look at what he has to say about sympathy:

But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary.’

Wait a minute, this isn’t sympathy at all. It’s empathy. Smith argues, extensively, that the fundamental driving force behind moral actions is the drive to understand the people around us and walk in their shoes. Why doesn’t he use the word empathy? Well, it didn’t exist as a word in the English language until 1904, according to the OED.

So what’s the big takeaway from all this? Adam Smith’s Wealth of Nations set generations of businesspeople down a path based on self-interest and an extreme disinterest in other people. But he himself believed quite strongly that our moral sensibilities, what we believe to be the better parts of ourselves, are derived from interest in other people.

Empathy is not an emblem of weakness or sensitivity, in Smith’s view. It’s a way to practice self-interest on the lives of other people. And since self-interest leads to prosperity, understanding the self-interests of the people around you leads to the creation of wealth more broadly. Empathy is the most important business strategy of all. Well said, Adam.

Empathy is both hard wired into the human brain and is also the most important business strategy of all?”

I find problematic the notion that sympathy/empathy is ‘hard-wired in the brain’. That is not quite how Adam Smith put it, though his mentor, Professor Frances Hutcheson, did believe that people are born with a moral sense, like the other senses, sight, hearing, and touch.

Smith saw the development of a moral sense from social contact in society, starting with childhood (adults) then at the ‘great school of self command’ (other children, especially at school), and onwards to adulthood. Society was a ‘mirror’ for comments, good and critical, of our behaviour.

To follow this story, you should consult Smith’sTheory of Moral Sentiments’, a book he wrote in 1759, before The Wealth Of Nations, 1776, but the contents of both books he taught together at Glasgow University between 1751 and 1764.

It certainly become implanted in the brain, but is not hard-wired like the other senses. I am sure Tim Worstall knows this but just in case readers get the wrong idea, I have offered my two pence (I am also a Fellow of the Adam Smith Institute…).

Competing Commercial Interpretations of Adam Smith

There are various modern interpretations of Adam Smith’s legacy available. Some authors extolling the virtues of ‘greed is good’ (after Bernard Mandeville, 1724, and Ayn Rand, 1954), though neither author would attract any sympathy from Adam Smith, as indeed Mandeville explicitly did not (see Smith's Moral Sentiments, Book VII), and some other authors adopting Adam Smith’s moral philosophy as appropriate policy for modern businesses, or at least as an argument for readers of their mail shots to buy their books and attend their conferences, presenting their version of Smith’s philosophy.

One such is Lewis Green (‘Inspiring conferences and businesses for 25 years’) at the Bizsolutionsplus Blog (‘Featuring Solutions to Grow Your Business'): (‘lead with your heart: sell happiness and your and your business will flourish’) HERE:

“Succeeding in Business by Living Our Principles” Lewis Green

“While I recognize Gandhi, Hawn identifies Adam Smith as the father of spiritual capitalism. In The Wealth of Nations, Smith writes that “every man, so long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with any other man” is the best way to build wealth.

… Hawn also solidifies his argument using the book Business and the Buddha: Doing Well by Doing Good, written by Lloyd Field. In it Field quotes Smith's moral philosophy: "The average man and woman, along with the society in which they lived, should be the primary beneficiaries of a wealthy nation.”

In my humble work, I write about companies that follow Smith's philosophy, whether or not they know they are doing so. Why do these companies, big and small, follow such a moral philosophy? It's not just because it's the right thing to do, although they recognize that it is. It is also because putting people first (employees, customers and communities) increases productivity, drives employees and consumers to be loyal to the company, and results in excellent profits and revenues…

… Business models that are driven by greed and executives who either don’t know how or don’t want to change create this kind of apathy. According to a recent Gallup poll, 55 percent of employees are doing the bare minimum required of their jobs and 19 percent are actively working to sabotage your business. That leaves just 26 percent of employees who care."

As a response to the exhortations of the Geko school of greed (echoes of Bernard Mandeville school that has inspired Hollywood film-script writers, who probably don’t realize their mentor was not Adam Smith) such commercial pitches by the likes of Lewis Green do no harm (I haven't seen his pitches therefore cannot be sure).

Smith thought that competition was the best antidote to bad business models (the Incorporated Town Guilds, the spirit of monopoly, and the jealousy of trade that harmed consumer interests, including expensive wars and prohibitions).

Smithian competition reverses ‘Gresham's’ Law – the ‘bad’ money drives out ‘good’ money – by ensuring the ‘good’ competitive practices drove out ‘bad’ monopoly practices.

Adam Smith on the Falling Price of SUVs

In fits of enthusiasm to get a message across, writers (for hire) can always use the old dodge (forgive the pun) of invoking Adam Smith to sell their message.

Rex Roy of The Detroit News HERE: does it in racy style.

Rex Roy is selling the idea of buying an SUV of gargantuan proportions and invokes the name of Adam Smith and his invisible body part:

Rex Roy: Car culture: Doing the math: SUVs may add up to big value

So the family and I have just returned from a fantastic week of beaching up north.
“Good news: Up north is still there and wanted me to tell you as much. Bad news: For people driving fuel-sucking SUVs, the drive up north gives cause for some rational thought.

As I sailed home along I-75 behind the wheel of a borrowed 2009 Armada LE 4x4 (a Nissan of Chevy Suburban proportions but with worse fuel economy), I pondered the following ...

Remember Adam Smith's invisible hand of supply and demand? Well, Smith's hand is pushing prices on new and used leviathans down. According to some sources, current SUVs and full-size trucks are so heavily discounted that their price equals that of vehicles two years old

This exposes the phoney use of Adam Smith and the totally unnecessary invocation of the misused metaphor of ‘an invisible hand’. It’s unnecessary because the reason why SUVs at the top end are falling in price is nothing other than the higher cost of fuel to drive them.

Students learn that in preparatory classes for Economics 101. Having learned about how markets work (covered by Adam Smith in Books II and II of Wealth Of Nations) their tutors introduce them to a mystical, even magical notion to confuse them forever, which is redundant, adds nothing but confusion, the metaphysical properties of something invisible and a hand to boot, that is believed by their tutors (they learned it from their tutors) and passed on to them in the certainty of the ancient trade of witch doctors, whom are ancestors listened to in trembling fear way back when all humans on the planet across the whole world lived as hunter-gatherers.

Of what does this invisible hand add to the SUV fall in price when fuel costs rise dramatically and the entire media tells owners of them that fuel will hit $300 a barrel sometime soon, the earth is going to experience significant climate change in a decade or two, and life as we know it is going to be a memory for those still alive and an historic myth for our grandchildren’s grandchildren?

And that’s the problem with the misuse of the metaphor, mentioned only once in Wealth Of Nations, and then not even about markets. It is sloppy economics; worse, it takes modern economists back to the status of ‘witch doctors’ who, at least, had the excuse of their ignorance of how the world works. Modern economists, and journalists, today have no excuse for misapplying Smith’s use of common enough metaphor in his time.

Here’s how Adam Smith explained their world as they knew it, in his ‘intended juvenile essay, began while a student at Oxford (1740-46) and completed c.1749, but not published until 1795, after his death in 1790. For details see my: Adam Smith: a moral philosopher and his political economy’, Palgrave MacMillan, 2008:

a savage, whose notions are guided altogether by wild nature and passion, waits for no other proof that a thing is the proper object of any sentiment, than that it excites it. The reverence and gratitude, with which some of the appearances of nature inspire him, convince him that they are the proper objects of reverence and gratitude, and therefore proceed from some intelligent beings, who take pleasure in the expression of those sentiments. With him, therefore, every object of nature, which by its beauty or greatness, its utility or hurtfulness, is considerable enough to attract his attention, and whose operations are not perfectly regular, is supposed to act by the direction of some invisible and designing power. The sea is spread out into a calm, or heaved into a storm, according to the good pleasure of Neptune. Does the earth pour forth an exuberant harvest? It is owing to the indulgence of Ceres. Does the vine yield a plentiful vintage? It flows from the bounty of Bacchus. Do either refuse their presents? It is ascribed to the displeasure of those offended deities. The tree, which now flourishes, and now decays, is inhabited by a Dryad, upon whose health or sickness its various appearances depend. The fountain, which sometimes flow in a copious, and sometimes in a scanty stream, which appears sometimes clear and limpid, and at other times muddy and disturbed, is affected in all its changes by the Naiad who dwells within it. Hence the origin of Polytheism, and of that vulgar superstition which ascribes all the regular events of nature to the favour or displeasure of intelligent, those invisible beings, to gods, daemons, witches, genii, fairies. For it may be observed, that in all Polytheistic religions, among savages, as well as in the early age of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods. Fire burns, and water refreshes; heavenly bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters… And thus, in the first ages of the world, the lowest and most pusillanimous superstition supplied the place of philosophy. (Adam Smith, 1744-49. ‘History of Astronomy’, III.22: pp 49-50)

Modern economists who teach a 'theory', 'concept', or 'paradigm' of the invisible hand a lot to answer for.

Tuesday, July 22, 2008

Adam Smith on Justice at Doha

Selected quotatiosn from Adam Smith may be used to give a distorted version of what Adam Smith actually said and the mischievous misapplication of Smith's authority to curent events can become misleading.

Paul Rayment writes in (The Guardian, London 21 July) HERE:

Why a Doha breakdown wouldn't spell disaster. Ignore the urgent rhetoric surrounding the Doha round of trade talks. It's time for a rethink"

For those ministers gathering in Geneva, the voice to listen to is still Adam Smith's: "Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it…. Justice is the main pillar that upholds the whole edifice". The current state of the negotiations shows little sign of coming anywhere near this standard.
Far from being a disaster, a failure of the Doha round will provide countries, at all levels of development, with a much-needed incentive and opportunity for reflection and debate on how to restore and strengthen the basic principles of the world trading system in such a way that will not only meet Smith's criterion but also recover the broader and longer-term multilateral vision of those who shaped the original structure of international institutions in the late 1940s

This is another case of a quotation from Adam Smith being stretched too far. Here is the fuller version of what Smith wrote:

Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.

Though Nature, therefore, exhorts mankind to acts of beneficence, by the pleasing consciousness of deserved reward, she has not thought it necessary to guard and enforce the practice of it by the terrors of merited punishment in case it should be neglected. It is the ornament which embellishes, not the foundation which supports the building, and which it was, therefore, sufficient to recommend, but by no means necessary to impose. Justice, on the contrary, is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world, if I may say so, to have been the peculiar and darling care of Nature, must in a moment crumble into atoms.

In order to enforce the observation of justice, therefore, Nature has implanted in the human breast that consciousness of ill-desert, those terrors of merited punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty. Men, though naturally sympathetic, feel so little for another, with whom they have no particular connexion, in comparison of what they feel for themselves; the misery of one, who is merely their fellow-creature, is of so little importance to them in comparison even of a small conveniency of their own; they have it so much in their power to hurt him, and may have so many temptations to do so, that if this principle did not stand up within them in his defence, and overawe them into a respect for his innocence, they would, like wild beasts, be at all times ready to fly upon him; and a man would enter an assembly of men as he enters a den of lions

(Moral Sentiments, II.ii.3.3-4: p 86; The words selected by Paul Rayment are in bold. You should read the whole chapter to confirm what Smith meant by justice.)

Paul Rayment, former director of economic analysis at the UN Economic Commission for Europe. Co-author with Richard Kozul-Wright of: The Resistible Rise of Market Fundamentalism, Zed Books, 2008, stretches Adam Smith’s vital point that a society must have a tolerable system of justice in it for it to survive to misapply it to today's international negotiating process.

Justice is a negative virtue compared, say, to beneficence, a positive virtue. To behave according to positive virtues, you have to do something, in this case, to act beneficently, and in the absence of doing so you breach the virtue, again in this case, you are guilty of ‘the blackest ingratitude’, but cannot be forced to act beneficently. However, the negative virtue of justice must be conducted on pain of punishment (even, in 18th-century Britain, on pain of hanging).

Smith clearly is talking about justice under laws in a single society applying to a population within it. Paul Rayment is stretching ‘justice’ in Smith’s case to cover today’s international ‘society’, like, say the United Nations negotiations, which are not enforceable by laws in a system of justice in the same sense as applies within a national, or local, society.

Without specific laws – such as laws that state that certain countries must accept the demands of other countries regarding their trade relations, a wholly wooly idea and one given to serious irregularities – it follows that countries have rights to accept or reject the proposals of other countries and agreement can only be reached by each country volunteering to accept proposals, perhaps suitably amended, in a process otherwise known as negotiation.

Paul Rayment presumably believes that certain countries should, because they ‘ought’ to, accept certain demands from certain other countries, which is fine as a point of view, but it is not Smith’s moral philosophy of justice. Countries that block all progress in place of accepting what is acceptable to others (and this applies to all countries and not just one side only) may be guilty of short-sighted politics, which may be a pity for all of them, but it is not a breach of the negative virtues of justice according to Adam Smith.

In so far as they are contesting trade protection as in Doha, a favourite topic for Adam Smith, I am sure where he would make suggestions in matters of trade policy. He would favour a ‘gradual’ lifting of trade barriers (WN IV.ii.12-4: pp 457-72) to avoid severe disruptions and privations among the labourers’ families affected in all countries affected by such changes. He would also favour gradual changes in the injustices (breaches of domestic laws) in those countries where the gains from trade, and from domestic production, are stolen by their rulers for themselves from their own people.

It is a consequence of such behaviour that the labouring and unemployed poor remain so, and this alone is a situation of instability, military coups, political repression and, in too many case, civil war, from which their societies ‘crumble’, their state’s ‘fail’, and their common atrocities feature so regularly on the world’s television screens.

The above is the proper application of Paul Rayment’s truncated quotation from Adam Smith’s theory of justice in Moral Sentiments.

Monday, July 21, 2008

A Marxist Turns Adam Smith On His Head

Jayapradeep Viswanath writes in Organiser, New Delhi, India (27 July) HERE:

A Marxist leader evaluates his ideology—IV:

”Marxian distortion of economics

(This article is based on the book written by Marxist leader P. Kesavan Nair. He is frustrated with Marxism and his expose has become a bestseller in Malayalam.”

“The Wealth of Nation of Adam Smith, published in 1976 (sic) accelerated the growth of capitalism, this book gave theoretical foundation to the market economy. This stimulated the industrialisation in Britain. Smith explained that the wealth of a nation is based on the productivity of its people and, basis of production is human-work and natural resources. He emphasised the necessity of usage of high machineries. Smith believed that the market is an invisible source and it protects the interest of the consumer and the producer. Instead of production for consumption, he said, the consumption should be in accordance with the production. Due to the balance of demand and supply, the free market decides the price of products, Smith argued. It is suitable for the uncontrolled exploitation of nature and labour.”

Followers of one god (Karl Marx) must be careful not to create another dynasty, even if it is Adam Smith.

Wealth Of Nations did not ‘give a theoretical foundation to the market economy’; it was one of several author's works that discussed how the commercial economy worked (Books I and II of WN). To say that WN, or any other book ‘stimulated the industrialisation in Britain’ is is fanciful.

Whether Smith had published WN or not, the industrialisation of the economy would have continued in ignorance of his works, just as the entire history of commercial societies, and the transition from hunting to herding and farming has commenced and continued over many millennia without the aid of a ‘theoretical foundation’. To indulge in such panegyrics is pure fiction and exaggerates the role of the philosopher (continuing bad habits from a ‘vanguard party’ sect); society does not depend on a book to change. Smith was right; Smith the role of the philosopher is to understand the world, not, as Marx alleged, to change it!

Smith did not “emphasise the necessity of usage of high machineries”. Power-driven machinery hardly existed in Smith’s time; ‘manufacturing’ was by hand-driven not power-driven machines, literally by hand. Power came later.

Smith knew of the Carron ironworks at Falkirk, set up by his friend Dr Roebuck, but he didn’t discuss it, and anyway it was a clear exception to the workhouses and small plants he knew about (the famous pin factory, nail makers, plough makers, weavers, blacksmiths, tanners, stone masons, and so on).

Smith did not believe “that the market is an invisible source and it protects the interest of the consumer and the producer.” It was very visible and he wrote about how it worked very clearly; competition protected the consumer. In fact he never mentioned the invisible hand (Book IV) in connection with his analysis of markets (books I and II).

As for “Instead of production for consumption, he said, the consumption should be in accordance with the production”, the Marxist author is so far wrong, I have to ask if we are reading the same Wealth Of Nations?.

Smith wrote:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce” [WN IV.viii.49: p 660]

One could add that it was not just in the mercantile system, but also in all state managed economies that “the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.”

Apparently, the original author of these misleading thoughts “is frustrated with Marxism”; I am frustrated with the [Marxist author’s] erroneous exposition of the alleged views of Adam Smith and I despair if this author’s expose is a best seller in any language, anywhere.


Adam Smith on Nanny-Minded Governments

Philip Johnston writes in The Daily Telegraph (21 July) UK; HERE:

‘Billions wasted and they just shrug it off’

For an economic historian brought up in Kirkcaldy, Gordon Brown seems remarkably indifferent to the writings of that town's greatest son, Adam Smith.
"It is the highest impertinence and presumption in ministers to pretend to watch over the economy of private people, and to restrain their expense," Smith wrote in The Wealth of Nations.
"They are themselves always, and without any exception, the greatest spendthrifts in the society."

In his wildest dreams, Smith could not have imagined just how spendthrift they could be. UK public sector net borrowing for the first three months of the financial year was at £24.4 billion, the highest quarterly since records began in 1946.”

A fine article it is too about the problem of overspending. The problem is exacerbated by the relentless, widespread, and almost irresistible pressure right across the institutions of the country, of which the apparatus of government is both the initiator and the sympathetic receiver of recommendations, to extend the regulatory intervention habit.

This morning on my daily (well, almost daily) early walk, I heard a ‘Chief Executive’ of ‘Alcohol Concern’ making a plausible case on 'Five Live radio' for new regulations of the night club, club and pub business (apparently worth millions) to ensure that they ‘don’t serve alcohol’ to under 18s, ‘don’t serve alcohol’ those who have ‘too much to drink’ and ‘don’t cut drink prices’ to encourage over-drinking, and ‘to be drunk in public’.

Moreover, a ‘new regulatory body is to be set up’ to implement standards, to educate business owners in the new regulations and to ensure that they ‘train their staff properly in the regulations’.

I kid you not!

The fact that the offences ‘serving under 18s’, ‘serving drunks’, and ‘encouraging over drinking’, and being drunk in public’ are already illegal and there are stiff legal penalties if prosecuted and found guilty. Moreover, untrained staff are not a defence for breaches of these laws.

So why do we need a new regulatory body, with an executive, senior managers, inspector staff, training staff and all the expenses per head, plus rent, buildings, travel, and accommodation – probably not costing less than £15-20 million a year – and for every year into the distant future?

Adam Smith was right.

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” (WN IV.ii.10: p 456)

The penchant for using taxpayers’ money to interfere in the application of existing laws with new layers of legal regulation is now endemic. The difference with Smith's day is that governments now devolve their interference through regulatory bodies, which spend taxpayers’ money (which remember also comes from poor people too), carry out their tasks to a variable standard (usually promoting yet more and tighter regulation), and they become less accountable for their failings that match their inadequate achievements.

Apply existing laws! That's why they were passed in the first place.

Sunday, July 20, 2008

Small Note of Smith and Malthus

Mir Mahfuz ur Rahman writes in The Daily Star Blog:

“Rice haves versus rice have-nots” (HERE)

ONE of the basic necessities of a commodity's availability is trade. Adam Smith, in his seminal work in 1776, had shown that comparative advantage of nations through trade was the key to increasing the economic wealth of all nations.

Rev. Thomas Malthus put forth the idea of a future world where a majority of the people starves due to lack of food. Given the circumstances of the world in the past two years, Rev. Malthus may be considered a sage even though he himself, as a man of God, may not have been happy about the reality of his prediction.”

Adam Smith’s trade theory was based on absolute advantage – a country trades what it is better at than others, for what goods they are better than it. Comparative Advantage was a theory advanced by David Ricardo in 1817.

Thomas Malthus described a ‘law of nature’ that had operated for thousands of years: the ‘Mathusian Trap’, namely that as subsistence rose, population would grow (more babies survive, life expectancies increase), but population would eventually run ahead of the necessary subsistence to support it, and subsistence would fall per capita, reducing population as infant morality increased and life spans shortened.

The irony was that just as Malthus was publishing his population theory, Britain was experiencing rising per capita consumption and rising population and the Malthusian Trap was not sprung because food output exceeded population growth in the industrialising commercial societies and has continued to do so for the past two hundred years. (See: Gregory Clark: A Farewell to Alms" (Princeton University Press, 2007)

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Incorporated Guilds were not Forerunners of Businesses

Ian Williams in the Deadline Pundit Blog (HERE)

“The Barbarians are no kind of solution
Boycotting big business

Private equity firms have become rich at the expense of workers everywhere. It's time to recognise their sins:

“Adam Smith's "invisible hand" is much quoted. However, he also knew what happened when businesspeople meet behind closed doors

People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.”

Misleading inference. These were not ‘business people’ as we know them today. They were members of the Incorporated Trades established by law in each town and city who had a legal monopoly on who could make or sell the goods of their trade, be it weaver, linen maker, butcher, baker, brewer, salter, instrument maker, blacksmith, forger, carpenter, wheel-maker, cabinet maker, carriage maker, knitter, knife sharpener, milliner, and such like, all of whom who had to have serviced the requisite apprenticeship with a master resident in the town or city. In short petty shopkeepers, mainly run by tradesmen, artisnas and labourers.

These were the town Guilds, established in Elizabethan times and their nearest modern equivalent is in modern Guilds (Screen Actors Guild) and skilled trade unions, not business people. They set prices and other restrictions to narrown the competition from other towns and excluded from employment anybody not already recognised as such who might arrive from elsewhere.

The Glasgow Incorporated Trades prevented James Watt (who served his apprenticeship elsewhere) from trading as a ‘mechanic’ in 1761 (he was born in nearby Greenock) anywhere the town. He was saved from unemployment by Glasgow University and employed as an ‘instrument maker’. The University just outside the Glasgow city boundary was legally exempt from their jurisdiction.

The University’s model Newcomen Steam Engine broke and Watt was asked to fix it; he did, and went on to design and make major improvements to it, securing his invention by patent and from that work entered business to make commercial steam engines. The rest is history.

On the Senate at the time was Adam Smith who supported Watt's appointment and who opposed monopoly restrictive practices preventing workmen engaging in any trade they wished.

Adam Smith on The Chartered Tradng Companies

In this week’s Economist an anonymous author has linked problems with the financial problems at ‘Fannie Mae’ and ‘Freddie Mac’ with Adam Smith’s well known strictures against the East India Company in the 18th century:

‘Toxic fudge’ (17 July): (HERE)

Chartered by Congress; out for themselves
“ADAM SMITH thought that private companies chartered to fulfil government tasks had “in the long run proved, universally, either burdensome or useless”. That has not stopped them thriving.”

Slinging in a quotation from Adam Smith is a lazy way of writing about today’s problems and in this case the author betrays a limited knowledge of both Adam Smith and the 18th century private Trading Companies and the nature of Smith’s criticism.

It’s the bit about these private companies being “chartered to fulfil government tasks” that is almost completely misleading, as if they are like the ‘off balance sheet’ steps of modern governments to get government debt off the national accounts to mislead voters about the amount of public debt and effective breaches of the so-called ‘Golden Rule’ much lauded by the Prime Minister when he was Chancellor (and similarly in the US with student and mortgage debt).

The 18th-century Trading Companies were wholly private enterprises in which large capitals were necessary to fund their global operations. They were established by Royal Charter direct from the King or by Act of Parliament.

Their Royal Charters gave them in British Law legal rights to enforce a monopoly of the territory for which they were Chartered. [Incidentally, all British universities are appointed as such by Royal Charter, which is their legal accreditation to award degrees; without a Royal Charter no organisation in Britain may call itself a university, nor may it award degrees.]

The British government had no jurisdiction over these territories, and didn’t seek any. The initiative for securing a Royal Charter was wholly sourced from among their private investors in ‘joint stock companies’, who sought their charters from the King, with an unspoken passing of gold between the petitioners and those who had access to the King, some of which gold passed to the hard up King. Similarly, there were expenses to persuade legislators to support a Bill for an Act of Parliament.
The process was driven by the desire for a monopoly of the trade with certain territories and to keep out independent ‘adventurers’ who would take trade away from the company. A similar process of seeking Charters was associated with the setting up of colonies in North America, supported by Cromwell’s Navigation Acts that created a monopoly of shipping trade for British boats, manned by British crews and serving British ports.

While Smith defended the Navigation Acts for the secure defence of an island country ('defence is more important than opulence'), he did not approve of the monopoly nature of the Royal Charters for territorial trade (except in the initial stages to start the trade off, but not indefinitely as in the East India Company.

For a flavour of Smith views of these arrangements look up these pages in Wealth Of Nations (they contain some of the best and clearest writings of Adam Smith in polemical mood):

The private interest of our merchants and manufacturers may, perhaps, have extorted from the legislature these exemptions as well as the greater part of our other commercial regulations.” (WN IV viii.3. 643)

But the cruellest of our revenue laws, I will venture to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature for the support of their own absurd and oppressive monopolies. Like the laws of Draco, these laws may be said to be all written in blood.’ (WN IV.viii.18. 648)

It is unnecessary, I imagine, to observe how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous; but which, in this case, is so plainly sacrificed to the futile interests of our merchants and manufacturers” (WN IV.viii.47: p 660)

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.” (WN IV.viii.54. p 661)

It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it”. (WN V.i.3.18: p 741)

The joint stock companies which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can in other respects scarce ever fail to do more harm than good. Notwithstanding the most upright intentions, the unavoidable partiality of their directors to particular branches of the manufacture of which the undertakers mislead and impose upon them is a real discouragement to the rest, and necessarily breaks, more or less, that natural proportion which would otherwise establish itself between judicious industry and profit, and which, to the general industry of the country, is of all encouragements the greatest and the most effectual.” (WN IV.i.e.40: p 758)

Saturday, July 19, 2008

Adam Smith On Sugar and Scalping Concert Tickets

An unsigned piece on (The Wilmington Magazine, Wilmington, North Carolina) HERE.

Laissez-faire or laissez-foul?(July 18)

'Ah, free enterprise - the capitalist doctrine that allows a person to buy a ticket at face value and sell it for many times that. Some people call it scalping.
It used to be widely illegal, but many places, including North Carolina, have recognized that it's futile to fight the law of supply and demand.
In recognition, North Carolina's Honorables have decided to make Internet scalping legal, wiping out a previous ban on selling tickets for more than $3 above the face value.

The bill has the backing of, among others, our professional sports organizations, which value money and attendance more than an innate sense of fairness.
To some extent, scalping is the ultimate homage to capitalism. If someone's rich enough or foolish enough (maybe both) to plop down $2,500 so his little princess can see a real pop princess on stage, far be it from Adam Smith's disciples to stand in his way. The seller makes a profit, Daddy's princess is happy, and the law of supply and demand lives on.

When the spirit of free enterprise prevents the majority of fans from picking up tickets at a fair price, however, laissez-faire becomes extortion


Adam Smith’s disciples’ – a mixed bunch if ever there was one, running from the Bernard Mandeville's ‘greed is good’ school of Hollywood script writers and other interlopers, who missattribute their selfish nonsense to Adam Smith, through to the modern economists who have never read Adam Smith but use ‘rent-a-quote’ Internet sources instead, and on at last to that small band of economists who have read Adam Smith and don’t prattle on about ‘high priests’, ‘disciples’, and other unlikely imaginary worthies – are unlikely to take a stance on the price of tickets for a venue that cannot hold everybody who wants to attend and the low ticket prices the promoters print for the fixed number of places available.

I haven’t heard of fans of Opera being put off by the extraordinary high prices for performances by the top – very highly paid – names in the business. With the availability of other media, ‘live’ concerts are rationed by the space available. When the Rolling Stones played Copacabana Beach free, the audience reached one million. The space was rationed by the closest distance from the stage fans could get to. A stadium seating 80,000 rations seats by price, but the prices are set well below the matching demand; hence, re-selling takes place, and will take place whatever the promoters devise or are ordered to impose.

If mum and dad want to buy a ticket for ‘little princess’, it’s going to cost them. If I want to go to watch Manchester United, it’s going to cost me (and has). If no tickets are available, I can’t go. It’s no time to teach ‘little princess’ anything different – you could fill venues for pop stars several times over with all the ‘little princesses’ who want to go for nothing (they don’t pay for their seats – their parents do).

That the State Governor of North Carolina, and the ‘Honourable’ members in the State Capital, get involved in banning and unbanning ‘scalping’, with parents taking sides (what about those parents who cannot afford even the ticket price for their ‘little princesses', never mind those who can?), we have a classic state intervention too far.

In Adam Smith’s time sugar was very expensive, and Adam strongly liked sugar too; he could afford it on £900 a year. The majority of people in Edinburgh couldn’t afford the price of sugar, at least in the amounts they would have liked to have consumed it, but he didn’t demand that the Prime Minister introduce a law to lower the sugar price. He took the longer view; follow policies that promoted economic growth and through growth increase employment that permitted the spread of opulence. That would bring (and did) the availability of sugar to the table faster than any other route.

As it was, the UK legislators did not follow his advice very strictly, but even still, sugar appeared on the tables of working families by the end of the 19th century – it was on my family’s table even during the 2nd World War with rationing in force and it had been on family's table in the 1920s (my Gran had a sugar bowl from that period).

Now the deeply impatient among us will be in despair and shout in frustration that two or three generations is far too long to wait: ‘What do we want?’ ‘Sugar’! (or free concert seats); 'When do we want it?’ ‘Now, now, NOW!’ (You must have heard that refrain by now about whatever they are in a hurry for.)

But the brute facts of life are that you cannot hurry into existence the benefits of a commercial market or substitute for the slow and gradual growth of an economy – socialism tries this with disastrous results – only the Commissars got sugar on their table and got to go to the big concerts. Meanwhile, fans can get to the free concerts…which may not be daddy’s ideas of what is appropriate for his ‘little princess’.

Friday, July 18, 2008

Excellent Letter from Don Boudreaux of Cafe Hayek

Don Boudreaux at Cafe Hayek Blog ( carries one his great letters to a newspaper, that is so good I just have to post it here too. It's not just his constant campaign for free trade, which is of Bastiat standard in fearless good sense journalism, but his price challenge to those who believe (it must be a belief because it couldn't be an argument based on reality) that they are 'worse off' now than in the 1970s, which is influenced by the undoubted visible perception of the rise in money prices and limited perceptionof the hidden rise in real incomes, is so precise, economical and brief, that I do not think it can be bettered:

"Times Aren't of '70s Bad" from Cafe Hayek HERE :

"Here's a letter of mine sent recently to the Atlanta Journal-Constitution:

We can debate just how closely the economy of 2008 parallels that of the 1970s ("Today's crunch feels like '70s," July 13). But one big difference unquestionably - and happily - distinguishes today from the dismal days of disco: no wage and price controls. This fact alone goes far toward making our prospects today brighter than they were during the presidencies of Nixon, Ford, and Carter. No inflation camouflaged by government fiat, and no long lines at gasoline stations or anxiety about finding fuel.

Plus, we're much wealthier today. Those who doubt this truth can get any Sears catalog from the 1970s, study it, and ask if they'd prefer to use their 2008 incomes to buy 1970s-era products at 1970s prices, or buy today's products at today's prices. Even though nominal prices in the 1970s were much lower than prices today, very few persons would choose the 1970s option.

Sincerely, Donald J. Boudreaux"

How true, and if worked out for every decade from the 1900s to the 1970s, I would not be surpised to see the same or similar responses.

Many angry Bloggers, politicians, and callers in to radio programmes believe they live in the worst of times, that are getting worse still. I read rants condemning everything about the rich parts of the world that they live in, sometimes overshadowed by their sight of deadly forces of the night, on the eve of a catastrophe beyond human understanding, but not quite here just yet.

Until I see people escaping from the Western countries, huddled in unseaworthy boats, under tarpaulins in lorries crossing their borders, stealing planes and flying anywhere but North America and Europe, and claiming refugee status in Africa, South America (Cuba even), parts of Asia, including North Korea, and Russia, I shall never take their cries of anguish seriously.

The traffic is all one way. Nobody is abandoning commercial society to return to hunter-gathering, though some preach at a distance just how great it was for humanity when it depended solely on what it could gather, catch and kill in the forests of long ago - when, as John Locke put it: 'all the world was [16th century] America' - but few if any of these aimlessly disastisfied myopics buy one-way tickets to go without any of the appurtances of western life (medicines, photos, metal knives and water-bottles), and strip off, dump everything, to join the hunter gatherers in the upper Amazon, the Highlands of Papua New Guinea, or the Kalahri desert, of which I can only say to them if they ever have a go: 'good luck, you'll need it.'

Adam Smith was right: the labouring poor had endured privation since their ancestors left the forest for shepherding and farming, and commercial society gave their descendants to opportunity to share in the spread of opulenc for the very fist time in 11,000 years. As far as I can see, nobody in the poorer parts of the world wants to go back to the forest; they want their share in opolence too.

Why Study the History of Economic Ideas?

Mike McBride, a guest blogger at asks (18 July): “how important is it to know your discipline’s history?” HERE:

If we base our answer on the material covered in the first year of core courses in economics graduate programs, then it is would seem to not be very important in my discipline. Yet, this is an unfair way to approach the question. The next question should really be: “Important for what?”

Let’s try a different route. It does not seem very important to know the grand history of your discipline to be a contributing member because your contributions are made at the research frontier. You only need to know the other relevant literature also at the frontier. (Or maybe the cynic would say it matters a little for establishing credibility with reviewers who want you to at give at least cursory mention to famous papers/books in your introduction.)

I remember learning this lesson as an undergraduate when I saw the list of references in one of my professor’s papers. I naively asked him how he could have neglected to cite Adam Smith’s Wealth of Nations. He chuckled and said that he’d never cited Smith in any of his papers. I was shocked. I wondered how it was possible to do economics without relating your work to Adam Smith.
Although I left this sweet innocence behind years ago, I often find myself revisiting my discipline’s history. Doing so gives me insightful perspective into how my own work fits into the overall discipline. It also aids in teaching because students love stories; if you can teach them a little history behind ideas and controversies, they are more excited about the material. But even better than these practical reasons is the thrill of encountering the evolution and synthesis of ideas. Living in the world of ideas is one of the best perks of our profession.
How important is it to you to know your discipline’s history? In what ways?”


I posted this short reply direct to Orgtheory:

‘The problem with citing Adam Smith in economics papers today is not that he had nothing to say of interest to today's researchers but what they do say about his work is almost always wrong; sometimes the citation does not correspond to the modern- day context even if the words used are similar (e.g., transposing Smith's analysis of the Royal Chartered Joint-Stock companies as if it applies to modern corporations) when the context is completely different.

There is also the misapplication of an isolated metaphor of 'an invisible hand' into a 'grand theory', a 'paradigm' even, when Smith used it simply as a metaphor on two occasions, once in Moral Sentiments and once only in Wealth Of Nations (his reference in his 'juvenile' 'History of Astronomy' referred to the real beliefs of pagan religions that Jupiter's hand cast thunderbolts at the enemies of Rome).

Smith did not refer to markets when using the metaphor in Book IV of WN (markets are exhaustively discussed in Book I and II without mentioning the metaphor). Those economists interested in following up this example amy contact me for a copy of my recent paper: 'Adam Smith and the Invisible Hand: from metaphor to myth' (gavinATnegwebDOTcom).

The professor who 'never cited Adam Smith' most probably had never really read him because he didn't need to. Smith wrote about the real economy, almost as an inter-disciplinary treatment; professors today write about an imaginary economy absent human beings, almost entirely imaginary in abstract mathematics and not the real world. That is why there is hardly any agreement on economic management or policy among the profession. Governments and those who advise them hire economists who fit their politics, as they did in Smith's day.’

There is an active core of economists interested in the history of ideas in the discipline. In the North America, there is the History of Economics Society, which can be contacted at:
Or direct to the Treasurer:

HES holds an Annual meeting, this year’s was in York University, Toronto (last year’s was in GMU, Fairfax, Virginia). You can see my reports of both that I attended by scolling through Lost Legacy. It also publishes a scholarly journal, The History of Economic Thought.

There are active sister societies of HES in Europe and Australia. For lively debates and research that informs modern debates, these are excellent entry points for young scholars and those hardened professionals of vintage ages.