Tuesday, September 30, 2008

Property is a Necessary But Not Sufficient Condition for Liberty

Marc Lombardo, writing in The Public Sphere, 14 September, (HERE):

Your Government Lied to You. So What?”

“Adam Smith made the economic significance of Locke’s notion of private liberty more explicit, showing that the concepts of property and liberty are fundamentally intertwined. Smith argued that even the public good (i.e., what is best for all) is most effectively and efficiently pursued only when private interests are left unchecked by any external influences whatsoever (most especially, that of the government). The liberals defined private liberty as existing only to the extent that the government did not interfere with it. This in turn required that private liberty could only be protected if and when private individuals came together collectively in order to limit the exercise of governmental power upon their lives. As such, from the liberal viewpoint, the ability to do what one wants in one’s private life depends entirely upon the public and cooperative practice of constantly and diligently surveiling and criticizing everything that the government does. The active public manifestation of the distrust of government is the basis for all other private liberties

Marc Lombardo makes an assertive statement about the role of property in history but misleads about the views of Adam Smith when he ties property to liberty as if one was an essential component of the other.

Property was certainly a decisive break with past when individuals regarded patches of territory as belonging to them and not to others, and enforced their claims with violence. Without property there would have been no civilisation to follow, though, of course the former did not lead to the latter in one, or a few steps, or in a short period of time, nor did it do so everywhere.

Adam Smith saw the origins of civil government in the enforcement of property rights, and in consequence, the denial of property rights to others (the majority) (Lectures in Jurisprudence, 1763). Shepherding and farming could not develop without property in land and the flocks and plants on it (the Cain and Abel parable is one example from written history, many millennia after property first developed in the Near East from 11,000 years ago).

Property came first; liberty in its modern sense came later, much later. But without property there would have been no meaning to liberty, because property created the possibility of surplus over individual needs that could feed much larger populations and employ stone builders that are the familiar indicators of the presence of superior technologies. This was Smith’s point in his comparison of the effects of the division of labour between the ‘savage’ societies of North America and Africa, and those of North-Western Europe in the 18th century.

Liberty evolved in the crises of governments. Turbulence – or politics- features in all governments; competition within and among the elites is endemic. Those further down the hierarchy seek to influence or replace those further up. The tensions among property owners and among governments are the stuff of history. Long periods –even millennia – without other than cyclical change are the norm. Liberty is not a norm, but it is an improvement on what goes without it.

In Britain’s case, the emergence of liberty is documented in Smith’s account in his Lectures in Jurisprudence and to a lesser degree in his Wealth Of Nations. From the struggle with the Barons, a king conceded the provisions of Magna Carta. In the fates of successive monarchs, sovereigns conceded the veto of parliaments over their spending. So, even with highly restricted constitutional changes and restricted franchises, liberty percolated downwards, slowly and gradually, towards the majority – eventually.

That is why Marc Lombardo takes the wrong interpretation of the relationship between property and liberty. Property rights are one, not the sole, manifestation of the prelude to liberty. Property rights emerged in various guises throughout and across the world without developing ideas or practices of liberty, and even in the majority of the most developed of Western European societies, and in China and India (two colossi economies for many millennia) there was hardly any signs of liberty emerging throughout their histories up to Smith’s time.

Transposing the struggle for liberty solely to the rights of property owners against those of civil governments is more an indicator of modern versions of property rights associated to some extent with libertarianism and with far right politics.

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The Lonely Truth About Invisible Hands

In a welcome change to the majority of commentators on the financial problems of US and UK economies - which are near universally trapped in a market-failure narrative to do with the failings of the 'invisible hand', wrongly attributed to Adam Smith, I open my survey of them with a more accurate assessment that I find in a Blog called the 'Drudge Retort' (HERE):

"The Invisible Hand - Adam Smith

A phrase often quoted and alluded to, it conveys the unintentional benefits stemming from individual's pursuit of their own wants and needs.

The Butcher, the Baker, and the Brewer provide goods and services to each other out of self-interest; the unplanned result of this division of labor is a better standard of living for all three.

There are two important features of Smith's concept of the "invisible hand".
First, Smith was not advocating a social policy (that people should act in their own self interest), but rather was describing an observed economic reality (that people do act in their own interest).

Second, Smith was not claiming that all self-interest has beneficial effects on the community. He did not argue that self-interest is always good; he merely argued against the view that self-interest is necessarily bad. It is worth noting that, upon his death, Smith left much of his personal wealth to charity.

On another level, though, the "invisible hand" refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations (although Smith did not, himself, use the term with this meaning in mind).

For example, Smith says, if a product shortage were to occur, that product's price in the market would rise, creating incentive for its production and a reduction in its consumption, eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost plus a small profit, the "natural price."

Smith believed that while human motives are ultimately out of self interest, the net effect in the free market would tend to benefit society as a whole. This was later adopted as a universal principle by the laissez-faire economists of the 19th century."

It was a pleasure to come across this piece this morning after reading through 229 depressive reports to the contrary last evening.

At least one commentator understands what many top economists do not: the version of the invisible hand which they attribute wrongly to Adam Smith is a stick with which the enemies of markets are using now to beat them in favour of government solutions.


Monday, September 29, 2008

Lost Legacy Online Again

Many thanks for your patience since the storm took out my French Internet connections.

It has been for me a very trying time, particularly in light of the US and British credit crunch crisis. Comments on Adam Smith's alleged role and views have been most annoying.

One group, the mockers, have been trouncing Adam Smith for his alleged views on the invisible hand of the market 'not working', which is a wholly silly charge given that Smith did not have any theory of an invisible hand having anything to do with markets. This notion was invented by 1950s modern neoclassical economists to give their theories of general equilibrium an aura they did not (and do not) deserve.

Well, the turmoil in the credit markets gives opponents of markets and supporters of more government an axe to cut down market-minded economists from offering positive solutions to the turmoil. Those proponents of markets who purvey the myth of the invisible hand have much to answer for. They created a stick with which they are going to take a beating.

Smithian economists are of a different persuasion. They can counter the wilder government sponsored schemes with a genuine Smithian response, of which I shall comment upon throughout the following days.

It will take me some time to work through the backlog of mail and comment, so please bear with me.

Update: French Telecom/Orange say they will restore my Internet connection on 3 October and I hope this will not recur again. Rural France has many attributes which normally give me much pleasure, but connectivity and alternative providers are non-existent when something goes wrong.

Meanwhile, I am back on-line in Edinburgh...

Thursday, September 18, 2008

Offline Temporarily

Hello Bloggers,

Gavin has asked me to apologise, and inform you that he is unable to upload any new blogs temporarily due to a large electrical storm that has hit his holiday home in rural France. His internet connection has been broken, and all his neighbours have suffered the same fate, so he has no internet access. France Telecom is trying to fix the problem, but due to the large area which has been affected it could take 10-14 days, but hopefully less.

The Lost Legacy Blog will be back in action as soon as possible.

(Gavin's daughter - safe in Edinburgh)

Wednesday, September 17, 2008

Using Invisible Hands to Attack Markets

In the Sudbury Star (Ontario), an author warns politicians to:

'Beware promises about gas prices' (HERE):

“Whatever Adam Smith's invisible hand of the marketplace can't fix, federal NDP leader Jack Layton's iron fist of government will give it a shot.

"What's more important -- big oil and gas companies making huge profits or protecting average Canadians who are getting ripped off at the pump?
"Stephen Harper sides with big oil. New Democrats stand up for Canadians."

That's not from Das Kapital, it's just a press release from Nickel Belt NDP candidate Claude Gravelle on his party's promise to regulate gas prices.
And why wouldn't a populist party take such a stand? Gas prices are all the rage so far in an otherwise under-whelming election campaign. Last week, they shot up 13 cents a litre, in part due to speculators and in part due to a shortage of supply caused by a reduction in refining capacity following Hurricane Ike in Texas.
Governments are not going to solve the problems with increasing gas prices. Consumers have more power to affect prices by using vehicles that get better mileage and altering their lifestyles to use less gas.

Given that prices are indeed elastic in an unregulated market, and thus dependent on supply and demand, lower demand means lower prices.
But governments can't do that for us.'


Tom Sherry writes in Citizen Times, (Asheville, NC) HERE:

I used to say, “The free market is a natural system. A strong economy is best served by staying out of its way.” But we no longer live in 1776 when Adam Smith wrote about the “invisible hand” of market economies. Huge financial markets, derivative traders, and massive government spending have changed that.

Letting Fannie Mae and Freddie Mac fail would be like letting a lightning strike burn all of New Mexico in order to hold true to the idealistic notion of preserving “the natural order of things.” Those who hold fast to the idealism of free markets, family values and natural ecosystems will find constant frustration as they long for a world that has passed them by


In Business Report, 17 September, (HERE) we find:

Profit and social reform are mutually exclusive concepts

“The system has long outgrown the small, village-based enterprises that existed when economist Adam Smith wrote his seminal The Wealth of Nations, where he postulated the existence of an "invisible hand" that moderated supply and demand, prices and profits, to the benefit of all.

Today we live in a world of large, transnational corporations that still function on the principles outlined by Smith. This, simply put, is that businesses compete to supply the demands of the marketplace and they succeed only by providing the right product at the right price.

Bornstein gives examples of "non-profits" changing government policy or mind-sets. But the question remains: has anything changed fundamentally? Have their new ideas merely been assimilated into a system that contradicts the whole idea of non-profits and collectivism?

There is obviously no invisible hand to control the system.

This has resulted in the "absurdity" of overproduction and overcapacity to produce everything from textiles to computer chips. The result is cut-throat and increasingly bitter competition between corporations. Companies are constantly looking for cheaper methods of production


bschlog’ writes in Bbbbblllllbbblblodschbg (16 September) HERE:
“Adam Smith: made of fail”

“As the subprime mortgage crisis tumbles more and more dominos, it’s becoming clearer that, in fact, corporations need the visible hand of government to keep them from spinning out of control. Free marketeers be damned. The evidence is against them.”

What do these posts have in common? They have all been sold the myth of the Invisible Hand and labelled Adam Smith.

No doubt replicated all over the place in the midst of the present financial turbulence, ensuring that the chickens are homeward bound to roost.

Correspondents regularly ask me why I bother repudiating the invisible hand as being related to Adam Smith’s authorship, when I am not charged with misunderstanding the metaphor (even by distinguished scholarly colleagues).

Well, modern economists created a stick with which to beat those who doubted the significance of general equilibrium models or who challenged the alleged mystical (even divine) workings of commercial economies that somehow (never explained) ensured it produced the optimum outcome for the public good because, they assert with absolutely no evidence Adam Smith said so.

Now the believers and those who oppose markets on principle (strange, given the universal poor results, both personal and in terms of the public good of these tried and untried alternatives) are using the trumpeted myth of the invisible hand (which had nothing to do with Adam Smith on how markets work) to beat back the defenders of markets as better able to deliver what people want than politicians, single-issue campaigners, and anger-driven reformers.

There are many roles for the state, as Adam Smith acknowledged and which I regularly remind readers of on Lost Legacy. He was not opposed to state intervention in serious emergencies, and example of which you can read in his writings on the free trade in corn and his clear statements in favour of public intervention when corn markets are severely disrupted, often by cack-handed politicaly motivated ‘anti-dearth’ programmes that often initiate the famines they seek to avoid, Book IV, Wealth Of Nations).

In the storm of anti-market hysteria that builds up when events overrun normality we should quietly explain how economies work, how they recover, and what those politicians, who smugly believe that a week is a ‘long time’, are doing to make things worse, unintentionally of course.

All taxpayers’ money that governments mobilise to ‘support’ the economy originate in the commercial sector. If that dies, the economy dies – witness Zimbabwe; witness the release of commercial behaviours in India and China, as the state has pulled back from doing what it is not very good at; and witness how commercial actions of profitable businesses overcome the fall-out from banks in trouble (compare HBOS-Loyds TSB with the dragged-out saga of Northern Rock).

Maybe, economists should concentrate on how markets work and not on mythical nonsense about invisible hands (and that other nonsense of the visible hands of governments).


Tuesday, September 16, 2008

Stretching a Metaphor Too Far

A pseudonymous Blogger writes (15 September) on Westhawk (‘idealism, then reason’) HERE:

“Who deals better with Putin? Sarkozy or Adam Smith?”

'While French President Nicolas Sarkozy leads the European effort to deal with Russia’s incursion into Georgia, might Adam Smith’s “invisible hand” have the tightest grip on Vladimir Putin’s neck?'

What does it mean?

The post seems to believe that economic uncertainty constrains Putin over Georgia. If so why doesn’t he or she say so?

Is this an example of the author’s ‘idealism’ (sign of a virgin cynic?) or his/her ‘reason’ (sign of gullibility?).

In any case, it has nothing to do with Adam Smith.


Monday, September 15, 2008

Adam Smith Was Not an Extremist

Marc Lombardo writes: ‘Your Government Lied to You. So What?’ in the The Public Sphere Blog Here:

John Locke argued for limiting governmental powers on the basis of a strict distinction between public and private: the king can perhaps tell a man what he ought to do when that man is out in the world, but no one should tell him what he can or cannot do when he is in his own home. The male pronoun is instructive in this case, as Locke was effectively transposing the classical figure of the pater familias, resulting in the birth of a peculiarly modern entity: homo economicus.

Adam Smith made the economic significance of Locke’s notion of private liberty more explicit, showing that the concepts of property and liberty are fundamentally intertwined. Smith argued that even the public good (i.e., what is best for all) is most effectively and efficiently pursued only when private interests are left unchecked by any external influences whatsoever (most especially, that of the government). The liberals defined private liberty as existing only to the extent that the government did not interfere with it. This in turn required that private liberty could only be protected if and when private individuals came together collectively in order to limit the exercise of governmental power upon their lives.

As such, from the liberal viewpoint, the ability to do what one wants in one’s private life depends entirely upon the public and cooperative practice of constantly and diligently surveiling and criticizing everything that the government does. The active public manifestation of the distrust of government is the basis for all other private liberties. The U.S. Founders, being good liberals, naturally placed the “First Amendment” first in the Bill of Rights

The article is actually about President George W. Bush and his alleged wrongdoing over the Iraq war, of which I have no comments as I do not vote in the USA. I am, however, concerned with Marc Lombardo drawing Adam Smith into the argument:

Smith argued that even the public good (i.e., what is best for all) is most effectively and efficiently pursued only when private interests are left unchecked by any external influences whatsoever (most especially, that of the government).”

This is not what I read of Adam Smith’s views (he didn't believe in Homo economicus. The private realm was not absolutely sacrosanct. That is stretching Smith’s philosophy too far (well past breaking point). There are numerous exceptions to the absolutist viewpoint – Adam Smith was not a libertarian. In the absence of other revenue-raising sources of taxation he accepted the need for import tariffs to fund government expenditures, even at the expense of sacrifing Britain being a free-port.

Certain areas of private life were sacrosanct – the natural law theories of the right to one’s person, one’s labour, one’s property (the latter modified because he accepted the right – the necessity – of taxation for legal purposes, as voted by the legislature, not demanded by the sovereign).

It was in this respect that he saw Britain’s parliamentary veto over the King’s taxation powers as the real essence of liberty, which made the British sovereign a constitutional monarch and not an absolutist monarchy as per France, Spain and elsewhere. Liberty in Britain, and what liberty became in the United States, were not quite the same idea, at least as far as Smith was prepared to acknowledge publicly.

Contrary, even to quite modest libertarian ideals, Smith endorsed the Acts of Navigation, instituted by Oliver Cromwell and continued by the restored monarchy into the mid 19th century, which conferred on British -owned, and British-crewed, shipping an absolute monopoly of commercial trade with and among the British colonies in North America.

These Acts constituted a breach of natural liberty, as did the coinage, the post, the quality stamping of cloths, assay marking of gold and silver plate and bullion, the need to erect party walls to prevent the spread of fire, the issuing of small denomination currency notes, interest rates, banking, public works to facilitate commerce, education, health, organizations of religious denominations, and the administration of justice.

I am not convinced that Adam Smith would have agreed with:

As such, from the liberal viewpoint, the ability to do what one wants in one’s private life depends entirely upon the public and cooperative practice of constantly and diligently surveiling and criticizing everything that the government does.’

That amounts to a policy of perpetual criticism of government practice, an impractical ideal and a rather juvenile ambition of a small minority of ‘professional demonstrators’ whose single-issue agendas easily lead to extremism and becomes as tyrannical as the stereotypes of the people whom they are criticising.

Most people in Smith’s day – and I dare say in ours – have other things to do of greater importance to them, such as families, work and play, than to be in 24/7 opposition to ‘everything’ governments do. The obsessions of the people in the ‘beltway’ and the ‘Westminster Village’ are of limited interest to most people in democracies, even when governments behave really badly.

It’s hard enough to get a large majority to vote out the lot currently in and to vote in the lot currently out.

Adam Smith did not have a vote under the existing franchise in Scotland and I do not detect any particular wish he may have had to have a vote.


All Now Clear on Polany's Error

Arnold Kling responds to our criticism of his apparent endorsement of Karl Polanyi and clears his name decisively: "My Most Incorrect Belief" by Arnold Kling (HERE).

In response, I posted the following as a comment on the EconLib Blog:

"Hi Arnold
I did not mean to 'beat you up'. My target was, and remains, Karl Polanyi.
The 'propensity to truck, barter, and exchange' was embedded in human behaviour (according to Adam Smith) deep within prehistory. It occurs in non-monetised subsistence economies, including 'frontier' economies.

My neighbours in France, selectively exchange their labour and machinery among themselves, especially during the vindage (when the grapes are picked) without cash changing hands and it does not appear in National Income statistics. I assume something similar used to happen among 'Moonshiners' in the Appalachians...

Early British colonies in North America traded between the motherland and themselves in cargo-sized amounts, which percolated inwards over time. The 'second-hand' market in artifacts, capital goods and materials is often neglected by Historians (see Smith's remarks about King James VI's marriage bed ending its days in an Inn in Fife).

Monetised markets evolve over time but are rarely totally absent within a territory.
I know now you agree; hence, I shall withdraw unreservedly and gracefully, and with apologies for indicting you for 'errors' you are not committing, and preserve my ire for Polanyi and Co.”


An Indian Blogger Understands Trade Policy

Sauvik Chakraverti (Libertarian) writes in Antidote, India, (HERE:)

"On Kamal Nath Once Again"

"This is the darndest yet:

Our commerce minister, Kamal Nath, has made a public statement that the growth of India’s exports is being stymied by the ministry of finance under P Chidambaram.

K Nath is aiming at 200 billion rupees of exports – but this target cannot be achieved because of Chidambaram’s intransigence on certain policy issues.

Note that the commerce minister’s only goal is to increase exports. He does not want to increase imports – which is why he walked out of the WTO and wrecked all prospects for freer international trade.

India is actually leading a band of poverty-stricken Third World countries at the WTO – all of whom want to export everything and import nothing.

The guiding economic theory for them is a spurious “balance of payments” kind of argument: exports “improve” the BoP; imports don’t.

This is the false idea of “mercantilism” that Adam Smith refuted. Like Kamal Nath, the mercantilists also thought that exports were better than imports because they led to an inflow of gold. Imports led to a gold outflow – and surely that was bad for a nation. Mercantilists therefore attacked the Honourable East India Company, which was exporting gold in order to import and profitably sell spices – mere luxuries and fripperies, according to these critics.

Adam Smith’s central argument was that the “wealth of a nation” consisted in the properties and possessions of its people. These are best augmented through imports. The country should therefore export whatever it has an advantage in – and import the rest. He called for free trade – and this was achieved thanks to Cobden, Bright and the Manchesterites some 50 years later"

Follow the link: to read the rest of this excellent piece - minus some minor quibbles.

If only the rest of the politicians in all countries understood the fallacies of mercantile political economy. Sauvik Chakraverti understands the realities of the world's obsessions with 'jealousies of trade', a disease that infects every trading nation, and which was exposed by David Hume and Adam Smith in the 18th century.

Sunday, September 14, 2008

Karl Polanyi was Wrong: Markets Existed Before 1750





Gavin Kennedy

I regularly visit an economics Blog, Oxonomics (‘a peer-reviewed, academic journal established by graduate members of the University of Oxford), because it is intelligent and thoughtful. Posts by Mark Koyama are particularly interesting.

A typical example of its quality is accessible in the debate that Mark Koyama is having with Arnold Kling of the well-established Blog, The Library of Economics and Liberty, written with Bryan Caplan at http//:econlog.econlib.org

On this occasion the subject is about the existence of markets in Ancient civilisations, particularly around the Mediterranean. The issue is important for historians of economic thought, not least because arguments that assert that commercial markets did not exist before 1750, as presented by Karl Polanyi in The Great Transformation (1944), directly contradicts Adam Smith’s assertion that the ‘propensity to truck, barter, and exchange’ became endemic in human behaviour was a ‘necessary consequence of the faculties of reason and speech’, placing its ‘very slow and gradual’ social evolution deep into pre-history.

Hence, my interest in Polany’s hypothesis. I mention it briefly in Adam Smith: a moral philosopher and his political economy (Palgrave Macmillan, 2008).

You can read the Oxonomics debate HERE, HERE, HERE and HERE

To which I have appended the following brief comment:

Polanyi was quite wrong in his (ideological) assertion that markets did not exist before 1750.

Roman soldiers were paid in silver coins - they spent these on consumables, indicating existence of markets. Ships criss-crossed the Mediterranean for millennia, mainly for trade purposes.

The fall of Rome in the 5th century set back commerce for nearly a thousand years until it began to revive in the 15th century. Trade among eastern Europe, Arabia, India and China was extensive. Where there is trade there is propensity to 'truck, barter, and exchange' (Adam Smith placed this deep into prehistory: ' faculties of 'reason and speech').

The best demolition of Karl Polanyi is by Morris Silver, 1995: Economic Structures in Antiquity, Greenwood Press, Conn

I recommend the debate both for conduct and for its tone and scholarly manner.


Saturday, September 13, 2008

Off-Line Only for a Few Hours - I Hope - Maybe More

I am travelling to France today (airlines going bust willing) and will be off line until I reconnect via France Telecom.

Cuurently, I am finishing final touches to my paper: 'The Pre-History of Bargaining: a multi-disciplinary approach, for the European Association of Evolutionary Political Economy, in Rome 3-5 November (papers due in on 20 September).

Everything is done online and that's today's problem: I am having trouble registering via a password that is not recognised, nor are its replacements. Worse, we can talk by telephone but we cannot by-pass the system. I hope this gets sorted out quicker than the normal pace of evolution...

Friday, September 12, 2008

Errors in Essays: Again

Something called Suite101.com publishes snappy essays, two of which I read with concern about their accuracy, at least as transcribed at this site (HERE):

Some Errors in the Essays:

Adam Smith was not born in ‘Kircaldy’.
It was, and remains, a town called ‘Kirkcaldy’.

Smith did not go to Glasgow and earn “his Masters degree three years later”. He spent 3-years at Glasgow (1737-40) and left for Oxford without graduating – a condition of the Snell Exhibition that he won.

He gained his MA degree from Oxford University.

Adam Smith guided the young Duke of Buccleugh (also spelt ‘Buccleuch’) on an intellectual tour of France and Geneva but it was not funded by “the Duke's father” (a repeated error).

It was funded by the Duke’s step-father, the Chancellor of the Exchequer, Charles Townshend, who had married the young Duke’s widowed mother. Townshend is also known for imposing the taxes on Indian tea that provoked the ‘Boston Tea Party’.

2nd essay HERE:

A system called Mercantilism, or the Commercial System, was in place.’

Smith referred to the prevailing economic systems as ‘mercantile political economy’ and not ‘mercantilism’.

The word ‘mercantilism’ came from German economists in the 19th century and Smith never used the word ‘mercantilism’.

his views led to the introduction of the Classical System”.

This confuses economic ideas and doctrine with real world events exemplified in the rest of the sentence: ‘which dominated European trade for well over a century’.

Another couple of essays on the Internet and both contains both factual and conceptual errors. A ‘Karen Murdarasi’ claims copyright over the two essays but students who use them risk losing marks for the errors, and Karen Murdarasi risks her reputation.

The essays site as reference authorities: “Sources: M Skousen (2007) The Big Three in Economics, S G Medema and W J Samuels (2003) The History of Economic Thought: A Reader”.

Knowing Steve Medema and Warren Samuels, both senior and distinguished scholars in the history of economic thought, I doubt that Karen has read her references carefully.

More to the point, does ‘Suite 101.com' not have editors who check the essays for factual accuracy before posting them?

Intervening decisively in Fragile Financial Markets is Not Analogous to an Instant Intervention in Long Standing Tariff Removals

Art Pritz in The Quad-City Times writes on: “Takeover of the Mortgage Giants: Any Precedents?” (HERE)

The mortgage meltdown was to a fair degree a result of deregulations implemented by the Bush administration as part of its neo-conservative agenda. Adam Smith, the godfather of free market economics, once pointed out that if you have a highly regulated economy, then you should not transition to a free market overnight without judiciously weighing and taking into account the likely results. He figured that chaos would surely result if one didn’t think ahead. He was, as usual, right considering how our current mess took place.”

It’s true that Adam Smith cautioned against the government dismantling tariff protections at a stroke, fearing that this would put thousands of poor labourers out of work. Much better he suggested that such drastic changes take place slowly and gradually to allow labourers to adjust to the changes.

However, it is a stretch to apply the same cautions to a large segment of the mortgage finance market (about 50 per cent in fact) who are going bust imminently.

The consequence in the resultant financial disruption if Fannie and Freddy went bust within hours would likely have been catastrophic for millions of employees if their fragile firms went bust over night on a scale much larger than a unilateral tariff reduction which would take some weeks, perhaps months to work through – tradable imports do not move an infinite velocity, one month kept low or out, and the next month flooding in.

In financial markets credibility is easily punctured. Acting when they did is good sense financial management.

In Britain the government dithered over the crisis in Northern Rock which worsened the crisis, and Northern Rock did not play on anything like the scale of Fannie and Freddie in their markets.

Essays on Adam Smith's Critiques of Contemporary Britain

Another essay writing enterprise called ‘Student of Fortune’

HERE is the Question:

"$7.00 Has Adam Smith's Vision Proved True?"


“In his book Wealth of Nations, Scottish economist Adam Smith argued that society's interests are best served by a private enterprise system in which individual entrepreneurs seek their own self-interest versus other types of economic systems. He felt that competition was a better way to regulate business than government planning and control. Discuss Smith's pure vision and the reality of contemporary practices. Explain whether or not his theory has been proved over the past 200 years

Students received the posted question on 11 September and have to send in their essays by 13 September, presumably to be marked. It’s not clear why it’s marked at $7, nor what happens next.

Maybe it’s properly assessed and they receive useful guidance; maybe the better essays for the stock of the organisation running the site.

Wealth Of Nations was a critique of the prevailing mercantile political economy of 18th-century Britain. It was not a blueprint for a pure economy. The reality of ‘contemporary practices’ should be contextualised to show that mercantile political economy never went away after Adam Smith died – it’s still with us in the 21st century.

Adam Smith on Wages and Strikes

An anonymous Blogger, who describes himself as ‘a humble working man’, is scribing a project he calls the Harvard Classics Project (“In which the Daily Reading Guide from my great-grandfather's set of Harvard Classics takes me on a random trip around old, old school Western Culture”) HERE:

Adam Smith Breaks It Down For You’

Adam Smith complete lack of affect, his utter refusal to take sides, I also find devastating. Check this passage out, about wage-slave/boss disputes:

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer....Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate

The Blogger reveals in his first Blog (December 2007) that he was ‘on strike’, though I doubt whether his circumstances as a striker were quite as bleak as those labourers in mid-18th-century Britain when strikes were illegal, when strike leaders could be flogged through the streets, and when labourers were desperately poor after a few days without their miserable wages.

He also notes that Adam Smith didn’t take sides in such events, though his sympathies were plain. Taking sides would have invited fairly serious discomforts for Adam Smith (there being no freedom of speech to anything like the degree that is prevalent today in modern Scotland).

You should follow the link for two other salient quotations from Wealth Of Nations, one on the necessary subsistence wages of “the lowest species of common labourers” in Britain, and the other on the better prospects for widows with children in the British colonies in North America.

Tuesday, September 09, 2008

40th Anniversary Conference of the History of Economic Thought (HET) Part IV

Professor Roger Backhouse, University of Birmingham, chaired the 5th session, consisting of papers by Professor Mathias Klaes (Keele University) and Professor Mary Morgan (London School of Economics).

I found Mary Morgan’s paper, “‘On a Mission’ with Mutable Mobiles”, and eye-opening account of the initial arrogance (of those initiating it, not Mary Morgan!) of planning economic development in the case of Nigeria in the early 1960s, easily replicable across much of the developing world with equally unsatisfactory –even counter-satisfactory – results.

Wolfgang Stolper, an American economist, arrived in Nigeria to join its civil service as Head of Economic Planning in 1960. His daily diary of what happened in the next two years forms the source of the paper, expertly woven by Mary Morgan into a critique of the ‘optimistic idealism’ of the people who believed that could ‘plan’ the growth of an economy of diverse constituent parts of which little was known of the kind of details necessary for such planning (assuming that they could know what was necessary; the didn't and they couldn't).

The image of the process and what was possible as seen from the top bore little relevance for what had happened and was happening on the ground. At least Stopler did more than look out of his window; he travelled around the country listening to what the local people had to say, and this, plus realising that much of the government apparatus hadn’t a clue about facts, led to his fairly realistic assessment of the likelihood of success.

The last session, chaired by Evert Schoorl, Groningen University, Netherlands (and host for the 2010 HET conference) was particularly informative. Professor William Coleman, of the Australian National University, was an impressive presenter on ‘Trade Unions in the Formulation of the Chicago Alternative to Keynesianism (and the Keynesian alternative to Chicago)’. Both schools of thought left out the trade union issue in their policy considerations. It didn’t fit the Keynesian model and Friedman discounted their influence in the US, while the unions have long been a major political force in Australia.

The paper by Professor Roger Sandilands (University of Strathclyde), ‘Solow and New Growth Theory from the Perspective of Allyn Young and Macroeconomic Increasing Returns’, was for me the highlight of the conference.

It was the only occasion when I contributed a short commen because of the importance of Allyn Young’s 1928 elaboration of Adam Smith’s theory of the division of labour, his disequilibrium approach to the economy, and the sources of continuous growth through markets extending and deepening, and from this process, all along the supply chains, generating further divisions of labour.

Professor Phillipe Fontaine (École normal supérieure de Cachan) presented the last paper ‘Stabilising American Society: Kenneth Boulding and the Integration of the Social Science, 1943-1980’.

The 2009 HET Conference is to be held in Manchester. I hope to attend it.


Adam Smith Did Not Have a View on Government Bailouts

Ernest Werlin, a columnist at the Herald Tribune writes: “Too big to fail ... or to survive? Determining U.S. bailout policy” (HERE):

Adam Smith, the father of economics, criticized governments giving grants to private enterprises. Smith supported competition to provide most efficiently the needs of society.”

I am not sure where Adam Smith made such a statement and would appreciate a reminder.

In mid-18th century, the government certainly purchased from private enterprise (defence, justice and civil project builders) and it issued Acts of Parliament and the King issued Royal Charters that gave monopoly powers and patents to private organisations and individuals. But ‘bailing out’ private businesses going bust (for that is what Ernest Werlin’s article is really about in the aftermath of Fannie and Freddie’s troubles.

It is not that Adam Smith took a stand that is worthy of comment on this modern issue – there were hardly any firms of such note. The government ‘allowed’ Dr Roebuck’s Carron Ironworks to go bankrupt; it didn’t bail out the South Sea Company, of ‘bubble’ fame, even though the Prime Minister among others lost their money.

This was not an issue for Adam Smith. Supporting new businesses with monopoly charters was fairly common, and was a policy initiated in Elizabethan times when the Guilds were given legal status, plus a lot of legislation that had great intentions but soon turned into deadweight drags on economic growth (the Apprentices Statutes, Settlement Acts, Navigation Acts, and Colony Charters).

To assert whether Adam Smith would support taking over Freddie and Fannie is absolutely pointless; he never faced such a question. But we do know he was in favour of regulation of the banking system in matters of currency denominations (Book II, Wealth Of Nations) and it setting up quality standard marks in key products.

Much beyond that is anybody’s guess; it wasn’t yet agenda for Adam Smith.


Monday, September 08, 2008

Adam Smith's Sufficient Conditions for Opulence

A shy Blogger enquires (HERE) on the Isegoria Blog (8 September):

What do Lego and 18th century political economist Adam Smith have in common?” and tells readers that “ Both show why Denmark has become the best country in the world for business”.

Speaking two decades before The Wealth of Nations was published in 1776, Smith said, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."

If ever there was a system that made following Smith's recipe look easy, it's the Danish economy's mix of low inflation and low unemployment, emphasis on entrepreneurship and lower taxes. These qualities combined with high marks for innovation and technological savvy lift Denmark to the top of our third annual ranking of the Best Countries for Business (formerly the Forbes Capital Hospitality Index).”

The Blogger does not identify herself (himself) but probably comes for Denmark and perhaps lives in or has visited the United States recently.

On the subject of the post, I cannot argue against it. It is true that Smith is believed to have read his paper at a Political Economy Club in Glasgow in 1755 and that it contained the passage quoted.

The problem is that only Dugald Stewart – the source for the quotation in 1793 – appears to have been the only person to have seen the paper and it was never published. His son, during a bout of mental illness, is believed to have burned it, along with some other of his father’s papers.

To what extent Denmark corresponds to the sufficient conditions allegedly mentioned by Adam Smith is something I cannot judge, but I am happy to pass the post onto readers.

One interesting possibility from Stewart's quotations is that it is possible that not all of Smith's strenuous efforts to have his private papers burned just before he died may not have been completely successful.

Maybe more will turn up one day.


40th Anniversary Conference of the History of Economic Thought (HET) Part III

Donald Winch, author, inter alia, of 'Adam Smith’s Politics: an essay in historiographic revision’, 1978, Cambridge University Press, and ‘Riches and Poverty: an intellectual history of political economy in Britain, 1750-1834’, 1996, Cambridge University Press, outlined his thoughts of ‘The Old Generation of Economists and the New’ for his new book of essays, Wealth and Life: essays on the intellectual history of political economy in Britain, 1848-1914.

In his talk Donald Winch explained why there may be differences between the intellectual historian’s perspective and the hisorian of economic theory or doctrine. The intellectual historian gets ‘close’ to the people in his historical account and which may be different from the historian of doctrine, whose references to the people who authored the changes in doctrine may be en passant than found in contextual studies.

I have a lot of sympathy for his approach, knowing how common it is for theorists of doctrine to ignore Adam Smith’s context as if they think he had, for instance, the happy coincidence of living in an open, secular and tolerant society.

Professor Tony Brewer, University of Bristol, took over the chair, for Professor Mark Blaug’s keynote address, which did not stir up the opposition I had expected, but then I did not know the economics of most of the participants, and I was relieved to find out that there were no vocal ‘Sraffians’ among the audience (the obscurity of the Sraffian economics monologue defies summary and any explanation for why it excites, or once excited, the in-group enthusiasm of a small cell in Cambridge).

Mark Blaug’s paper was on ‘The Trade-off Between Rigor and Relevance: Straffian economics as a case in point’, and what a demolition job it was too, summed up neatly in the title.

For Session 4, Professor Sheila Dow, University of Stirling, took the chair and introduced Professor Amos Witzum, London Metropolitan University, for his paper, ‘Positive Ethics and the Science of Economics: Robbins enduring fallacy’. I last heard Amos at HES 2007 at GMU, and he is, in my opinion, one of the best lecturer-presenters, on the circuit. He also is a neat theorist and worth listening to for his enthusiasm around ideas.

He was followed by John Maloney, another forceful presenter, on ‘Straightening the Phillips Curve, 1968-76’. The title was intriguing and is was an account of government policy around the alleged trade-off between unemployment and inflation, both within the debate between Friedman and Keynesian macro-policy, as discussed at the highest level within the relevant government departments.

I was fascinated by the details from departmental minutes and interviews with senior civil servants, conducted by Professor John Maloney, Exeter University. At the time, 1970-2, I was researching productivity bargaining and incomes policies at Shell Oil, attending negotiations between trade union shop stewards and management, and I saw the realities of the micro-application on the ground of the macro-‘certainties’ discussed at the top.

To think that all those endless hours of preparatory discussions by the parties, their bargaining exchanges, long ‘clichéd’ speeches and fraught mutual 'threats' of doom, were driven by a set of macro-equations of which the participants were in ignorance and from which they acted oblivious to their alleged concerns of the trade-offs they never mentioned, was a trifle humbling.

It was clear in retrospect that the people on the ground were in the dark about the thoughts of the people at the top. It is now clear to me that the people at the top, as represented by John Maloney, were also in the dark about how people in the field actually think and behave (of course, they don’t appear in the macro-equations).


Adam Smith: not guilty

Erle Frayne Argonza, of Manila, writes a Blog, Unladtau (‘development, economics, better world’), HERE: which contains this:


“It was precisely at that juncture of expanded slave trade when the BEIC’s talent scouts eyed the services of a Scottish gentleman, named Adam Smith who could fit into the mental Pied Piper prototype for BEIC enslavement pursuits. It would be no wise to contend that Smith was a mental robot or ‘Manchurian Candidate’ controlled by overlords behind the scenes, for Smith was a man of his own mind, and up to the last instance he was indeed that ‘organic intellectual’ for the slave traders. He just couldn’t qualify as ‘independent intellectual’ though, for Smith was, in the yardsticks of the autonomous intellectuals, a ‘prostituted intellectual’ or ‘intellectual prostitute’.

The rest was history. Both the erudite and simpleton among the schooled populations of Earth know what Smith’s economic doctrine is all about. And many folks today are aware that the neo-liberal policy regime of the moment was a rehash of the same Smithian physiocracy.”

Hardly worth commenting because it is so silly and wrong (‘a little nonsense is dangerous’).

The only point I would make for the record is that its author does not give a single example of Adam Smith’s writings, actions, or associations that would in the slightest degree suggest he was in the pay of the ‘BEIC’ (British East India Company) or of the slave trade.

The author doesn’t specify which particular slave trade – European, Arab, Chinese or Indian - or that he was even sympathetic to any such atrocious entities.

For Smith's views on the East India Compnay see: Wealth Of Nations, I.viii.26: p 91; I.xi.g.27-28: pp 222-25; IV.i.33: pp448-9; V.i.1-40: pp 731-58. Slavery is discussed in numerous places: see WN I.viii.41: pp 98-9; III.ii.8-11: pp 386-89 (and index).


Sunday, September 07, 2008

40th Anniversary Conference of the History of Economic Thought (HET)

Following my paper, Professor Glen Hueckel, Pomona College, California, showed the almost depressing complexity that Malthus delivered trying to rescue a labour command theory of value from its many in-built contradictions in his correspondence with David Ricardo. Not that Ricardo added much clarity to the subject.

The rest of the afternoon was taken up with three papers, chaired by Professor Vivienne Brown (Open University, UK).

The first was by Professor Yasunori Fukagia, Yokohama University, on political economy of land tenure in Ireland under the direct influences of the British government and the exploitative, often absent, landlordism that it engendered. Professor Renee Prendergast, Queens University, Belfast, offered a comment which included the point that the United Irishmen were not solely of Catholic affiliations; Wolf Tone, for example, a leading figure in the movement was a Protestant; it was what it called itself, ‘United Irishmen’ against ‘English’ rule. The religious divisions between ‘Protestant’ England and ‘Catholic’ Ireland came later.

I was reminded of the presentation of Sandra Peart and David Levy of the role of cartoons in political economy at HES in 2007 that showed disgusting and explicit racial biases in the mainstream 19th century press. The Irish disturbances brought out the worst in stereotypical caricatures from political opponents.

Professor Stephen Meardon, Bowdoin College, New Brunswick, Canada, gave an interesting presentation on Anglo-US rivalry in trade with the rest of the Americas in the 19th century, particularly in attempts at competing bilateral, ‘most favoured nation’ treaties. His account was compelling in its lucidity. [He had also offered some criticsm of my paper on the invisible hand.]

I couldn’t help thinking about Adam Smith’s admonition in the last paragraph of Wealth Of Nations for Britain to ‘accommodate her future views and designs to the real mediocrity of her circumstances’ (WN V.iii.92: p 947).

Having ‘lost’ the British colonies in North America but not taking the opportunity to avoid internaitonal entanglements, Britain’s strategic error was compounded by its second ‘empire’ across the globe up the mid-20th century, because it involved the ‘expence of defending those provinces in time of war, and of supporting any part of their civil or military establishments in time of peace’, and eventually local wars all over the world, plus two world wars, that ignored the ‘mediocrity of its circumstances’. Since the end of the second empire in the 1960s, Britain invested in the political, diplomatic, and military junior ‘police’ roles that its politicians bask in, as if there is now a third 'empire', to the detriment of the opulence its peoples should enjoy as the world’s fourth richest economy.

John Aldrich, University of Southampton, outlined his paper on ‘Probability. Statistics & Political Economy in Mill’s Logic’. It delivered things I did not know about Mill.

Next day, Sir Alan Peacock, an eminent economist with a distinguished career and a ‘classical economist’ of note, was in the chair.

Professor David Collard (University of Bath) developed a theme of general interest to me, ‘Alfred Russel Wallace among the Economists’. Wallace shared the introduction of natural selection to science with Charles Darwin.

The paper was an insight into the intellectual life of that slice of society in the 19th century, especially as Wallace outlived Darwin and had a ‘colourful’ scientific career. Wallace had finally worked out how natural selection worked, after years of field study, while incapacitated with a bout of malaria, and went on to ‘dabble’ in the para-normal and other mildly controversial fads.

[To be continued]


Saturday, September 06, 2008

40th Anniversary of History of Economic Thought Annual Conference, Edinburgh 3-5 September (Part 1)

The differences between History of Economic Thought and the usual academic conferences in themselves are quite small, but looking back in the aggregate they are fairly significant.

The number of papers accepted for presentation is restricted to 15 and there are no pre-selected ‘discussants’ that open the ‘debate’ on a paper, squeezing the time for audience participation.

All participants are free to comment within the 50 minute time available. The restricted number of papers does not require parallel sessions so every paper is presented to the whole conference. The time available for each paper – an opening 20 minute presentation by the author, strictly monitored by the session chairman – is increased, allowing more comments and questions from the floor.

The audience (about 40) is formidable for ‘new’ attendees like myself. There were so many ‘big names’ in the audience that knowing only throught their published work, and not personally, created certain tensions; knowing that these ‘faces’ knew more because they have studied Adam Smith for longer than I have, and have 'battle honours' from such themes as might touch upon, made me cautious. Meeting with several of them afterwards, I found them imbued with that quality I have noitced among senior scholars - a self-deprecating modesty and personal reserve about themselves.

My paper, ‘Adam Smith’s Invisible Hand: from metaphor to myth’, was the first on the agenda, the contents of which should be familiar to regular readers of Lost Legacy. The paper on such occasions carries careful academic referencing of the relevant literature as end notes in the paper, not normally a feature of a Blog post. Incidentally, readers wishing to receive a copy should email me (gavinAtnegwebdOtcom) and introduce themselves (pseudonyms and user-names are at odds with receiving something for nothing), and I shall send them an electronic file of the paper (you will not receive unwanted spam).

The session was chaired by Professor Steven Medema of the University of Colorado (Denver), now completing ten years as editor of the Journal of the History of Economic Thought.

One piece of private friendly advice I received later from a distinguished scholar (Professor Mary Morgan of LSE) was most valuable and will be addressed in my re-draft. My paper, she pointed out, does not open with a statement about the various ways in which modern economists use the metaphor of the invisible hand. In consequence it was not clear, she suggested, exactly to what I was objecting other than the assertion that Adam Smith did not mean the invisible hand to be treated other than as a metaphor.

For listeners, she asked, was I criticising the theory that an invisible hand that guided self-interested actions so that, whatever the intentions of the actors, they always produced benign outcomes, or was it a claim that the invisible hand was a mechanism that operated in markets (like the ‘free-rider’ mechanism in public goods)? Making this clear would guide listeners to the point I was making.

A theory can always be tested – did it correspond to or explain experience? Given that Adam Smith noted over 50 instances in Books I and II of Wealth Of Nations a selection of self-interested behaviours that had malign consequences (listed in the end notes to my paper) this make clear to economists my criticisms of the false ascription of such a theory to Adam Smith.

On reflection, I agree with Professor Morgan’s suggestion. I think writing Lost Legacy this past few years, it has become more or less a ‘conversation’ with myself. I know what I am talking about but I have slid into assuming that my several hundred daily readers also know what I am talking about, but when addressing colleagues, most of whom have not read Lost Legacy, they are left in the dark about its connections to modern economics.

Unfortunately, I cannot correct this weakness in my new book, Adam Smith: a moral philosopher and his political economy (August 2008), so I had better preface posts on Lost legacy with the necessary remarks.

The paper received a mixed reception, some friendly, some distinctly sceptical during the session - a few expressed private agreement later.

I shall report on some of the highlights for me of the papers that followed and the discussions.


Friday, September 05, 2008

40th Anniversary Conference of History of Economic Thought

I have been attending the 40th Anniversary Conference of the History of Economic Thought and I am preparing a report from my notes for Lost Legacy.

I hope to have it ready tomorrow.

Gold Was Not Wealth to Adam Smith

Al Robinson, 5 September, The Daily Reckoning (Australia) writes “Gold is the Oldest Form of Wealth” (HERE):

Well, gold has meant 'wealth' for ages. Before the economic revolution in the 18th Century, the two ideas were inseparable. If you wanted wheat you went and found some wheat. If you wanted wealth you went and found some gold.
This was before economists began to toss around other ideas of wealth. The new ideas varied in quality. Adam Smith said a man's real wealth came from accumulating capital and investing it. Karl Marx said capitalist wealth only ever came at the expense of workers. Craig James said shares always go up, so buy them and you'll be wealthy.

Some ideas are better than others. But before Smith's idea, gold held sway as wealth. Everyone agreed on this. Even Isaac Newton was a part-time alchemist. Between inventing calculus and gravity, he'd pop out to the back shed to whip up a batch of gold.

That's the funny thing about alchemy though. What if you actually could make gold from other metals? Gold would be worth about the same as those other metals. Basically worthless. It wouldn't be rare any more. It wouldn't be precious.
Yet today we have an economic system founded on this fallacy. Paper money is 'wealth' backed by the government. The government employs alchemists like Glenn Stevens and Ben Bernanke to create more money. And that means the whole stock of money is worth less.

Meanwhile, no-one's printing gold yet. We've tried every combination

Al Robinson’s views on gold being ‘wealth’ – a common enough belief – are his entitlement, as are the equally common belief that currency notes are wealth, but this was not the case with Adam Smith (as for Karl Marx, his notions were ideological – exploitation was not invented by capitalism, nor in the case of the Soviet Union did exploitation end with socialism).

Adam Smith never said that “a man's real wealth came from accumulating capital and investing it” in relaiton to gold.

Wealth for Smith was defined precisely as the “annual output of the necessaries, conveniences, and amusements of life”. Spain owned far more gold and silver than Britain – and the rest of Europe – but it was poorer than Britain or France, or what became The Netherlands – its GDP (in modern terms) was smaller than its European rivals.

Smith said that “a man's revenue came from accumulating capital and investing it” and, depending on whether he applied his revenue to productive (frugal) or unproductive (prodigal) employment he would become richer or poorer. Prodigality, and failed enterprises, or an iron box full of gold under the bed, was no route to riches.

The pursuit of gold, silver, and precious stones was illusory wealth – the successful pirates who buried their treasure were still poor until they swapped their gold, etc., for the ‘necessaries, conveniences, and amusements of life’ (depleting their future claims); gold bars in a desert will not quench thirst, nor did all the gold in Pompeii keep the hot ash from embalming anybody it touched, or stem the icy waters of the North Atlantic from flushing through the Titanic. ‘A horse, a Horse; my kingdom for a horse’ cries a king as the enemy swept on towards him.

Gold, and printed currency, is a store of future claims on the real wealth expressed as the output of economic resources. If there are fewer resources available from a real economy, gold will increase the prices of the remaining resources. Whether an economy stores gold and silver or consumes real resources (the necessaries, conveniences, and amusements of life) determines which is the wealthier.

Now Al Robinson is in the business of talking up the value of hoarding gold (what it can exchange for) and, like all other economic goods, there would be excess demand for gold if it was at zero price, but without markets in all real goods (those with prices), a particular good is worth whatever it will exchange for, including both what it may exchange for a particular ‘monetised’ good like gold or a printed amount on a carefully patterned piece of chemically treated paper.

Chasing gold or whatever in a world of limited real goods is making a fetish out of something that may be perfectly useless. For Al Robinson, his particular fetish has ‘value’ only because the world, including Australia, is awash with read goods. It may not buy him survival among the Yanomamö Amazionians.

Tuesday, September 02, 2008

A Cat Fight in Vermont

There is discord in ‘the green mountain state’ of Vermont according to the
VermontTiger.com HERE:

Following my comments on the Rutland Herald, Vermont, yesterday ("Workers Deserve Better"; Lost Legacy) the Vermont Tiger opines with:

“Discovering Adam Smith”:

“The Rutland Herald editorial page has managed to work itself into a lather this lovely Labor Day weekend. The paper's editors think rich people make too much money and it is an outrage and something ought to be done about it. They cite the CEO of General Motors as an example and, fair enough, the stockholders and the board might have considered firing the man sometime during GM's long decline. But that is their business. Perhaps the Herald's editors own stock in GM and that might explain their ire over Mr. Wagoner's compensation package. There must be some reason why they singled him out and not, say, Steve Jobs or Tiger Woods or Madonna or George Soros or any of a number of other people who made a lot of money last year and kept what the Herald would consider a parasitic proportion of it.

The Herald's choice of GM as whipping boy this Labor Day is interesting in that if the company does fail, that will be the end, pretty much, of the United Auto Workers. So, of course, there is legislation in Congress to bail the company out. The number being talked about is $50 billion. Is there any question how Senator Sanders will vote on this bill? Meanwhile, automobiles are being made in Tennessee – at a profit – by non-union people who are being paid good wages. Why should GM get a government bailout when it signed foolish contracts with the UAW twenty, thirty, and forty years ago? Surely the Herald's editors will address this question in one of their upcoming editorials.

Perhaps they will even work in Adam Smith whom they quote in support of their argument about people who make too much money. Smith, they will learn, had interesting things to say about many things. The Herald will, no doubt, soon be quoting him on free trade and, also, the sublime economic results that accrue to a society whose members are left free to pursue their own self-interest

I’d have to be closer to the rivalry of the two papers to give a view on what it’s all about.

Both sides quote Adam Smith at each other, which is either a case of ready access to an Adam Smith compendium of famous quotes or they are both Smithian scholars, well aware of the 18th-century context in which he wrote.

So far it appears to be a case of the former.

Monday, September 01, 2008

Lost Legacy Cited Twice Today

Economist’s View (Mark Thoma’s popular Blog) HERE: kindly cites my comments (‘Adam Smith and the Liberating Force of the Division of Labour’ (below) on Daniel Bulone’s article: ‘Adam Smith: Machine Minded Misanthrope or Merry Man of Manufacture’. His Blog also attracts some comments from other readers.

See also Michael W. Kruse on his Blog: Kruse Chronicle (HERE) for a citation to Adam Smith’s Invisible Hand and my comments: ‘The 'Indoctrination' of 6-year Old Good Economist

Citations, supportive, critical or in-between are always welcome at Lost Legacy. Reminds me that I am not writing solely for myself.

Adam Smith and the Importance of the Liberating Force of the Division of Labour

Daniel Bulone writes in Tunnel Vision (‘Observations on Exchange’), 1 September: “Adam Smith: Machine-Minded Misanthrope or Merry Man of Manufacture?” HERE:

Adam Smith lived in a time when industry was on the verge of revolution. A unique relationship between workers and machines had begun, one in which the two worked together, in an almost equal partnership, to produce marketable goods. This leads one to wonder if the newfound brotherhood of man and machine affected Smith’s writings. What is more, did Smith see people as a means toward an end? It is hard to avoid thinking as much, when he speaks of workers in terms of what they can produce. In WON, he spends almost an entire page analyzing the output of pin makers, and how they can become more efficient by dividing their labor. It is true that he was a scientist, whose job was to quantify the activities of workers. However, the way he speaks of the division of labor makes it seem as though it is a way to transcend the bothersome tendencies of humanity.

Smith states in WON that, “The rapidity with which some of the operations of those manufactures are performed, exceeds what the human hand could, by those who had never seen them, be supposed capable of acquiring.” Essentially, Smith’s process involves the greater value of the whole above that of the individual. According to him, people achieve maximum efficiency when they are cogs in a vast network of industry.

In addition to thinking of people as commodities, he does not have a particularly sunny view of humanity. When speaking of a common workman in WON, Smith states that the problem of too many tasks at once “renders him almost always slothful and lazy, and incapable of any vigorous application.” He also states that most of the technological innovations of the age had been created by bored, lazy workers who wanted to make their jobs easier.

The novelty of Smith’s somewhat cynical world view is that he spins it as positive. The idle curiosity of a lazy workman turns into “a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.” The mean necessities of trying to earn a living force people to “exchange a great quantity of his own goods for a great quantity” and supply his neighbors “abundantly with what they have occasion for.”

It would appear that Smith acknowledges a certain roughness with regards to humanity, and claims that it all works out for everyone’s benefit. If anything, he could be regarded as the world’s most perceptive optimist

This is rather a sad way to look at Adam Smith on the division of labour.

Smith’s approach, as a moral philosopher, was ‘to do nothing but observe everything’, and in his case he took the long-view of history to explain how and why a section of humanity in Europe had created societies somewhat advantageous to the spread of opulence compared to the stagnant 18th-century societies of India and China (the latter in the 15th century was on the verge of becoming the world’s leading economy – it had the technology - until it deliberately aborted its development on the instructions of a totalitarian emperor by cutting all links with other civilizations).

Also, compared to the earlier societies (‘the Age of Hunters’) of North and South America, the ‘meanest labourer’ in 18th-century Scotland was considerably richer in his annual consumption of goods than the ‘richest’ Indian (and African) Prince (Wealth Of Nations, I.i.11: pp 23-4). The difference in living standards (appalling as they may appear to appear to modern consumers) was down to the enhanced divisions of labour in Europe.

Instead of being relatively independent of others – each hunter going into the forest and with his own tools catching something for his family to eat, building his own shelter for the night and covering himself and his families with animal skins – the initial division of labour came from the propensity to truck, barter, and exchange one thing for another. Some people made arrow heads and flights for their arrows, others exchanged game for arrow heads, and so on. In doing so they became less independent and more dependent on their fellows and the mothers of their children.

The ‘pin factory’ by no means is the most important aspect of the division of labour in Adam Smith's view, though it is important to indicate the productivity consequences of co-operative labour, which is a singular matter of importance for the spread of opulence, especially among the lowest paid. To help to see this neglected aspect of Smith’s economic analysis, may I suggest that the rest of chapter 1 of Wealth Of Nations is read carefully (go on, read it now – its actually quite revealing of the beneficial role of the division of labour in the supply chain assembled to produce a simple commodity!):

Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated. Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages” (WN I.i.11: pp 22-23).

Indeed, it is in productivity gains all along afinal product's supply chain, and the many separate supply chains connected to points on it, that is main the source of economic growth and the spread of opulence, which constantly works away under the entrepreneurial drive and technological enhancement brought about by thousands of others.

Allyn Young considered that ‘Adam Smith's famous theorem that the division of labour depends upon the extent of the market … I have always thought, is one of the most illuminating and fruitful generalisations which can be found anywhere in the whole literature of economics’. This observation is particularly authoritative today because Young’s 1928 article in The Economic Journal article has recently promoted developments in modern growth theory away from its early versions (Harrod-Domar, Solow) towards recognizing increasing returns.

Smith went well beyond the restricted single-product example of a pin factory, with which most people associate his name, in his crucial example of the ‘multiplicity of trades’ in the making of a common labourer’s woollen coat, the ‘produce of the joint labour of a great number of workmen’, during which he displays emphatic and unusual excitement by placing exclamation marks at the end of three consecutive sentences, the last concluding: ‘What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen!’(WN p 23)

An individual firm supplies people in an economy ‘abundantly with what they have occasion for’ in respect of their product, and in effect and in return the people in the firm receive products of other firms that they ‘have occasion for’, and across society these transactions amount to ‘a general plenty’ that ‘diffuses itself through all the different ranks of the society’ (WN p 22). The more developed the society, the more interconnected are the separate markets for each good or service.

It is the extent of the market that drives the division of labour and the division of labour that drives the extent of the market. By considering only the ‘pin factory’ example of an aspect of the division of labour, Daniel Bulone (like many others before him) may have missed entirely the grand sweep of Adam Smith’s analysis, as well has missing the essential humanity of his outlook on the pressing need to liberate the labouring poor from drudgery of extremely low incomes.

The latter paragraphs of his post on Smith the ‘cynic’, and so on, are particularly unhelpful of understanding his general disposition that high wages are better for all concerned than low wages:

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society?*38 The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged…” (WN I.viii.36: p 96)


“…The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low” (WN I.viii.44: p 99).

I would have thought these sentiments would place Adam Smith on the side of the labourers on the issues that mattered most to them: higher wages are preferred to lower wages, a point worth remembering, I think, on Labour Day.

Don't Forget the Dignity of Labour





Gavin Kennedy

Rutland Herald, Vermont HERE:

"Workers Deserve Better"

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

Sounds like Karl Marx, doesn't it: From each according to their ability, to each according to their need? Only it's that most laissez-faire of capitalists, Adam Smith, from "The Wealth of Nations," recognizing that without the state's protection, laws and structure, capitalists could not make a profit, and so when they did, they should expect to pay the state accordingly in taxes.

Similarly, Smith expected capitalists to invest in their home countries, so its workers would be more prosperous and so able to buy more goods. But modern corporations have allegiance only to profit centers, not countries.

It’s Labour Day so, quite rightly, we get the usual spate of opinion pieces about labour. Some of these are quite extreme, which I find odd coming from the world’s richest economy with its workers having a lot less to complain about than those working for 12 hours a day in paddy fields, or for pence a day amidst squalour.

This fairly reasonable one is from Vermont – not exactly the rust belt of dark satanic mills – is about the taxation of profits.

The tone, however, is set with Adam Smith described as “that most laissez-faire of capitalists”, even though Smith never used the words ‘laissez-faire’, nor did he express views that could be construed to say that he supported such a notion; he was too critical of the behaviour of some ‘merchants and manufacturers' to give them an open season on consumers.

However, the quotation used is genuine. It is located Wealth Of Nations (WN V.ii.b.3: p 825) and is one of four ‘general maxims’ which have been ‘recommended’ to the ‘attention of all nations’, and, please note, they were not original to Adam Smith and derive from several authors in the same or similar form.

Taxing the income from distributed profits is fine in principle – as it is for most others individuals – though not for the lower half of individuals. Removing the lowest paid from taxation would be a major reform that would meet the criteria of fairness, justice, and good sense.

A ‘flat’ tax would achieve this, but no doubt would fall foul of ‘punish the rich’ populist clamour.