Sunday, November 30, 2008

Short Break in Posting

I am taking a short break in the north-west of Scotland, someway north of Oban, for a couple of days.

It may be possible to read posts but not to send them until Tuesday. Nothing much to do up there except walk a little, read a lot, and enjoy (I hope) some fine food. It's very cold today, with frost on the ground; on the west coast it's snowing, showering and blowing. Fine, bracing Scotch weather (think positive!).

On the way up I shall pass Inverary, where the 3rd Duke of Argyll had his Scottish residence and which Adam Smith may have visited, as the Duke was his main sponsor in his successful applications for his Glasdgow University chairs.

Smith's father had served the 2nd Duke of Argyll in the shananigans that brought Scotland into a parliamentary Union with England in 1707 - it was already a union of crowns.

His father also worked with the 2nd Duke's brother who became the 3rd Duke whom Smith knew, distantly. It was this fortuitous connection that earned him the Duke's favour in his university appointments and the opportunity to prove his genius.


Potted Biographies Add to Myths

Hanjae Lee (described as a 'teacher') writes a ‘biography’ of Adam Smith in the Blog, AP History HERE (I added 'sic' beside the 6 errors and one typo):

I was born in 1723 in Scotland as the son of Adam Smith and Margaret Douglas. My father had died before I was born, so I was raised by my mother. I attended Glasglow [sic] and Oxford universities and became a professor of moral philosophy at Glasgow in 1752. After lecturing for a couple [sic] of years, I published The Theory of Moral Sentiments in 1759. In the book, I argued that the human communication depends on sympathy between “agent and spectator.” But what I truly focused on was economy. [sic]

I believe that the impulse of self-interest work toward the public welfare in economy. I even wrote a book about it: An Inquiry into the Nature and Causes of the Wealth of Nations. A person “neither intends to promote the publick interest, nor knows how much he is promoting it… he intends only his own gain.” If each person chases his own interest, the general welfare of the society fosters as a whole. [sic] Free trade system is essential in this context for the maximum development of wealth; trades enable exchange of variety of goods. It is the “invisible hand” that regulate the market system and satisfied the economic needs. [sic]
The theory I developed is SO good that it will be still studied three hundred [sic] years later. How do I know?

In its 228 words, there are 5 errors and 1 typo. Smith was elected Professor of Logic in 1751, and transferred to Moral Philosophy in 1752. He published The Theory of Moral Sentiments in 1759, six years (not 'a couple of) after (7 years if we include his lecturing from 1751, during which he was lecturing on moral philosopy from October 1751 in place of his predecessor who was ill).

He did not focus on 'political economy', though he taught it for some weeks only as part of his lectures in jurisprudence (notes of which we have from his students). some of which were transposed direct into Wealth Of Nations, in addition to which he taught for months on 'ethics'. His interest in 'police', the then current term for the duties of government including the economic welfare of its citizens, was evident in 1762-3, and in rhetoric, a long standing subject he taught from 1748.

He certainly wrote about self interest but did not consider that this would or does 'foster' the 'general welfare of the society ... as a whole'. It was the consideration of the self-interest of others that was the driving force of the successful propensity to conclude exchanges with others. Self interest could also be destructive of welfare - 'the vile rulers of mankind', etc., of which he gives over 70 examples in Wealth Of Nations.

Nor did he consider an 'invisible hand' would "regulate the market system and satisfied the economic needs". That is a mid-20th-century myth for which there is no evidence in any of Adam Smith's writings on how markets work. See my paper downloadable from the Lost Legacy home page.

Hanjae Lee has passed on the myths about Adam Smith emanating from modern economists who use them as propaganda for their version of how economies work.


Saturday, November 29, 2008

Adam Smith on Tax and Borrowing

William Watson writes in Financial Post (National Post in Toronto, Ontario), HERE:

The Tories' negative stimulus

A still older tradition that we might call Smithian, though I don’t think Adam Smith ever made this case explicitly, might argue that if stimulus packages mean the government’s share of the economy will grow, that may actually cause net economic contraction since government will be much less efficient producing things than the private sector would be. So in fact an apparently contractionary package that reduces the size of government might actually end up being stimulative. This Smithian interpretation is the only one, so far as I can see, that could lead you to conclude the Tories’ Economic Statement is stimulative.

….The government is declining to borrow the monies in question and pay them to people who undoubtedly would go out and spend them. Ricardo, on the other hand, might think it a wash while Smith might see it as a gain

I have no comments on the merits or otherwise of the policies proposed in Canada to deal with the current financial crisis under my standing ordinance of not commenting on politics in countries other than the one I vote in. However, I am free to comment on policies that its proponents or local columnists associate with Adam Smith.

William Watson qualifies his statements with: “I don’t think Adam Smith ever made this case explicitly”, which is absolutely appropriate because it is true. In Smith’s day there was not a great deal of thinking about managing economies, or what we call macro-economics, or the government’s role in these matters.

Political economy had macro elements – the monetary system, the Bank of England (and the Bank of Scotland), the currency (gold and silver, and paper currencies, the individual banks, balance of trade, foreign trade of consumption, domestic trade, taxation, and the annual production of wealth or “necessaries, conveniences and amusements of life”) – but of government directed macro-policy, this was no such a ‘big idea’ at the time.

The government ‘sector’ was relatively small compared to the 20th-21st centuries (under 15 per cent compared to over 35 per cent), and its biggest item was ‘defence’ spending. If activity slackened off, unemployment rose (lost amongst the general destitution of the countryside and the towns), and farms and enterprises experienced bankruptcies, people didn’t look to government for relief.

When a ‘recent’ war ended, Adam Smith noted how, when

a hundred thousand of soldiers and seamen were deprived either of employment or subsistence”, which was “a number equal to what is employed in the greatest manufactures”, that while there was “some inconveniency” suffered, the seamen “gradually betook themselves to the merchant service” and the soldiers ‘were absorbed in the great mass of the people, and employed in a great variety of occupations” (WN IV.ii.42: pp 469-70; Canaan p 436).

It did not occur to him to demand government action; it did occur to him to advise government to move from protected to free trade ‘gradually and slowly’ to allow time for these events to work themselves out with the least direct harm to those affected.

William Watson is appropriately cautious in ascribing views to Adam Smith about situations he did not face, but because Smith considered waste and prodigality abundant features of government spending, with consequent negative affects on economic activity, growth included, Watson makes a plausible case for describing a possible ‘Smithian’ policy of not increasing the budget deficit to allow government deficit finance to ‘kick-start’ a sluggish or declining economy. To the extent that this is a current Canadian ‘Tory’ policy such a stretch of plausible ‘Smithian’ ideas ‘fits' Watson’s analysis in his opinion piece.

However, I am not inclined to go along with this argument, particularly as Britain is in a similar policy quandary. Government expenditure carries with it some degree of inherent waste, but some level of it nevertheless has some level of productive (in Smithian terms) effects; employing labour that covers its costs, including capital, plus a profit. A road, bridge, runway, or sports theatre, built by private companies with government funds, that earns profits adds to economic activity. So some element of that sort of activity is productive and positive, but it is unlikely to be sufficient or timely (big projects take years not weeks or months).

The other side of the argument is strictly Smithian. Taxation reduces private incomes, and though necessary for society at some level for defence, justice, public works and education (and the ‘dignity of the sovereign’), it also inhibits private consumption and savings below that they would otherwise have been.

Where taxes are ‘too high’ (a subjective assessment) and where, in consequence, government-determined choices displace private-consumption choices by depressing consumer demand, and the government choices are ‘locked into’ non-spending, because of ‘non-lending’ (a problem with retail banking at present), it may be Smithian to lower taxation fairly dramatically.

Of course, this would still increase government borrowing and its deficit. But by lowering taxes through removing taxation of all incomes below £12,000 per individual, so that millions of the poorest people pay no tax, and the rest pay no tax on the first £12,000 of their incomes (as recommended by the Adam Smith Institute HERE and HERE), there is more than an even chance that the result would be a fairly certain stimulus to private consumption, which would do more to re-activate the economy, albeit still slow and gradually, but also quicker than uncertain fortunes of big spending projects coming on stream in 12 to 18months, or even longer, from government ‘big projects’.

Smithian economics does not lead to a ‘do nothing’ anti-depression strategy, nor is it opposed to a government deficit. It is the quality of the counter-measures not their use that separates the advocates of big government ‘big fixes’ from Smithian better sense.

Governments do not trust individuals to do what is right; they prefer the visibility of big projects, not least for their photo-opportunities – and if that is too cynical they only have themselves to blame from their habits of a lifetime.

It seems to me that such a policy as the Adam Smith Institute proposes is compatible with any good government, Tory or otherwise.

Labels: ,

Friday, November 28, 2008

Adam Smith Did Not Regard Taxation as 'Evil'

Michel Pireu writes (28 November) in Business Day HERE:

Laissez faire — the scapegoat of the crisis”

"The name of Scottish philosophy professor Adam Smith has been linked with the cause of economic freedom ever since he published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776."

"He had a lofty view of the importance of the law of supply and demand, believing that it affected far more than the market. “The natural effort of every individual to better his own condition” was the foundation of all political, economic, and moral systems."

In Smith’s view, taxation was essentially an evil: first it was an infringement of liberty: second, it distorted the natural operation of the market."

He believed self-interest could be safely left to serve the common good. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. In spite of their natural selfishness and rapacity (the rich) are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made, had the earth been divided into equal portions among all its inhabitants,” Smith declared.

Mainly from Ideas that Changed the World by Felipe Fernandez Armesto

Michel Pireu is not quite being fair to Adam Smith and verges on being misleading about his ideas.

Adam Smith never believed that ‘taxation was essentially an evil’; he recognised the need to fund the essential activities of the sovereign state: defence, justice, public works and education (Wealth Of Nations, Book V).

These were essential for the continuation of society and for social harmony within it – without defence the society could be overrun by the depredations of neighbours (‘defence is of much more important than opulence’, WN IV.ii.30: pp 464-5); without justice the society would ‘crumble into atoms’; without public works to facilitate commerce, the society would not reach opulence; and without education, the poor in the society would be exposed to ‘the delusions of enthusiasm and superstition’ (WN V.i.f:61: p 789; Canaan, p 740).

Neither did he consider that taxation “was an infringement of liberty”. He was a strong believer in Natural Liberty as a philosophical approach to human rights for all societies, including those ‘despotical’, from the Natural Law theorists, Grotius, Pufendorf, Carmichael and Hutcheson.

But he considered that as the duties of government were clear, they had to be paid for and his first maxim of taxation was the ‘the subjects ought to contribute towards the support of the government, as near 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’ (WN V.ii.b.3: p 825; Canaan, p 777)

Now, of course, certain taxes and certain levels of taxation, especially those that breached his maxims, ‘distorted the natural operation of the market’. But this never meant that taxes should be abolished. Indeed, as staunch a supporter of free trade as he was, he was also pragmatic enough to note that even with his overall view, Britain could not become a totally ‘free port’ without some level of tariffs or duties on some goods, because customs duties played such a large part in government revenues.

On self-interest, Michael Pirue (or his sources, Felipe Fernandez Armesto – did Pirue not check his secondary sources before making definitive statements about what Adam Smith actually said?) achieves his alleged quotation from Adam Smith by advertenly running two separate sentences from Moral Sentiments and Wealth Of Nations together without informing the credulous among his readers about what he had done, and thereby giving the wholly false impression that Adam Smithbelieved self-interest could be safely left to serve the common good”.

Smith was never so imprudent (silly even) to assert such a thing.

The quotation from Wealth Of Nations about the ‘butcher, the brewer, and the baker’ comes from Wealth Of Nations (WN I.ii.p 26; Canaan, p 14) and the quotation about ‘natural selfishness and rapacity’ comes from Moral Sentiments, IV 1.10: p 184), and was about the delusion of rich landlords, not their exercise of self interest (and it has been discussed on Lost Legacy many, many times).

Adam Smith gave over 70 reasons why self interest cannot be assumed to always benefit societies and those in them in Books I, II, and II, of Wealth Of Nations.

He was not an ideologue; sometimes individuals benefited others (the propensity to exchange) and sometimes they didn’t (monopolists, protectionists, and such like – nowadays, polluters!).

Michael Pireu may want to reconsider the certainties by which he taints the legacy of Adam Smith. All he has to do is read for himself Smith’s works (or read Lost Legacy regularly).

Labels: ,

Two Excellent Adam Smith Institute Briefing Papers

For the best analysis and thoughtful proposals on the current financial crisis I recommend two briefing papers from the Adam Smith Institute (London):

The first analyses the financial crisis, its causes, the 'remedies' so far proposed, and its proposals HERE:

The second makes radical alternative suggestions for the government of Britain on how it could achieve so much more if it took remedial steps to immediately benefit average earning families and the very poorly paid by abolishing all taxes for the lower paid (earning under £12,000) and reducing taxes on average incomes by the knock on effects on tax allowances. This paper is HERE

Both ASI Briefing papers are welcome in the current mood of pessimism; the solution is actionable now by a government that claims to want to 'do the right thing'.

[Disclosure: I am a Fellow of the Adam Smith Institute)]


The State is Not a Solution - it is Only a Tool

Philip Stephens writes in the Financial Times (London: 28 November) HERE:

Broken banks put the state back in the driving seat”

“We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers' dollars to prop up the sinking US economy. Gordon Brown's British government announced it would soak the rich to pay for an economic rescue package.

In between times, the Bush administration all but nationalised Citigroup, the world's largest bank. For good measure it threw another, yes another, $800bn into the effort to thaw US credit markets. Everywhere you look, Keynes' demand management is replacing Adam Smith's invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.”

“Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks.”

“The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundred of millions of people from abject poverty.”

“What matters is the political symbolism: for Mr Brown, fairness now trumps aspiration.”

There are few quick fixes in political economy. The belief that there are quick fixes bedevils both those who see the market as the cure for everything and those who have great faith in the State to achieve what ever legislators decide is ‘best’ for everybody they govern.

State believers carry the additional burden that they have control of resources – many tens of billions worth – and the power to enforce their writ, however disagreeable or inconvenient, over the rest of us.

When States makes mistakes the damage they do is irreversible in the short to medium term and is corrected (assuming the state chooses the appropriate corrective behaviour) at an even slower pace than markets can take to self-correct its mistakes. The problem arises when States make decisions that cause long-term damage (albeit unintended) and the do not, or will not, introduce corrective measures, despite the evidence of failure.

Thus, the current spate of glee among slaves to ‘States-are-better’ (at least the ones run by them) about the current monetary crisis as a propaganda tool against markets, often with side-swipes at the supposed responsibility for the crisis attributed to Adam Smith.

The Labour government is educated enough than to place all their bets on State management, but they are following a line that drags towards ever greater involvement of the State in economic decisions. They have the defining example of the Soviet experiment in total State control as background and they have the awesome examples of State control (plus Kleptomanic mismanagement) of puny economies among the developing countries as foreground (with Zimbabwe’s hopeless monetary madness to the side).

Markets are better at generating economic activities than States. They are better at sustaining growing economic activities than States. They are also better at correcting faults in economies than States. But States have a role too.

Adam Smith saw their roles as defending the population from invasion (defence) and the trespasses of citizens on each other’s rights (justice). He also saw the State from its taxation revenues as the instigator of those public works that would facilitate commerce.

In his day the priority was the construction of a road transport system, canals, bridges, and harbours, which would not pay an individual, even a group of them, to undertake (add to which total there was the cost of erecting pavements in towns, street lighting, and sewage disposal. This amounted to a massive national expenditure, against which he considered the £176 millions spent in conducting the seven-years was a wasted opportunity.

Smith also saw the need for a massive investment cost in education. A ‘little school’ in every parish was ambitious and expensive. The majority of parents were poor in 18th-century Britain and, except for the very poorest, he felt they should contribute a few pennies for the salaries of the teachers. Today, we have moved on with two-hundred years of rising incomes and, to be frank, public education facilities are sub-standard. With the built – and to be built – public school estate, we need to move on and introduce the ‘voucher’ system to raise educational standards steadily.

The same reform agenda could be offered for health and welfare, two massive items in state expenditure (and taxation). On that other line expenditure in the State’s budget, defence, the last paragraph in Wealth Of Nations (WN V.iii.92: p 947; Canaan, p 900) said it well:

Britain should “endeavour to accommodate her future views and designs to the real mediocrity of her circumstances”.

What people ignore at their peril, the brute course of events will remind them - eventually.


Thursday, November 27, 2008



I have started to include the reference details to the 1937 Edwin Canaan edition of Wealth Of Nations from Random House to the usual reference to the scholarly structure given from the Glasgow Edition of ‘Adam Smith’s Works and Correspondence', published by Oxford University Press (also in the popular-priced printed edition from Liberty Press).

This is because not all readers have access to the Oxford University Press edition and the most popular edition, at least in the USA from observations and correspondence from readers, is the Canaan 1937 edition.

The 1904 edition of Canaan’s edition is also one that appears online on various sites, which is very handy too for quick online checks, though it does not follow the same reference points as the Oxford scholarly edition, used widely in the journal literature.

There have been several critical comments on the Oxford University Press, Glasgow Edition, not for its editorial work – which is sublime – but for the fairly high fees (£800-£1500) that its right’s department charges for quoting from its volumes in a published scholarly work.

Authors whose scholarly books are unlikely to make vast sums of money (‘popular’ books by scholars can pay their way, but they are unlikely to quote too much directly from the OUP editions) and heavy permissions’ fees can mean that the OUP makes more from the published book than the author.

Much noisy discussion ensues about how anybody can claim copyright in the 21st century over Adam Smith’s works all published during 1755-90? However, the claim to copyright is not in the words so much as in the minutely detailed editorial treatment, produced at considerable expence, that covers notes on all the variations in words and paragraphs from all the editions of his books, which OUP authors and editors include as notes and footnotes.

Short of copying out the words from early editions (1st to 6th) published in his lifetime – a major task for any scholar today – users of the OUP editions will just have to stump up the OUP permissions’ fees.

To assist those who do no have access to the OUP edition I shall endeavour, where time permits and location allows, to provide both the OUP refernce details and the Canaan 1937 page number.

Adam Smith on Banking Behaviour and Misbehaviour





Gavin Kennedy

Vino S’ writes on ‘Adam Smith on Banking’ on ‘My political blog and other musings’, HERE:

Adam Smith had more complicated views on economic, philosophical and political questions that some of his supporters or detractors assume. Here is a quote from him on banking, a sector which has contributed so much to our current financial crisis:

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. " - Adam Smith

I made the following comment on the ‘Vino S’ selected quote:

It is better if people read the whole of Adam Smith’s chapter on banking in Wealth Of Nations, ‘Of Money considered as a particular Branch of the general Stock of the Society, or of the Expense of maintaining the National Capital’ (Book II, chapter ii, pp 286-320; Oxford University Press, 1976, or pp 270-313, Edwin Canaan’s 1937 edition, Random House edition).

They will find Smith’s late 18th-century grand panorama of banking practices in Britain including the role of money as the ‘Great Wheel of Circulation’ of the economy, of the prudent banking that adds to the capital stock and to productive labour, of the imprudent and fraudulent behaviour of some individuals and, alas, some bankers, and the need on occasion for government intervention by laws and regulations to prevent the contagion of malpractice and dangerous behaviour.

Of the latter he had this to say about necessary government intervention (perhaps of great relevance for those of who reject any intervention on principle:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.” (WN II.ii.94: p 324; Canaan, page 308)


Brilliant Gem, But a Bit of Dross Too

Professor Mark J. Perry, a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan, writes Carpe Diem ('Professor Mark J. Perry’s Blog for Economics and Finance') and today’s post includes a gem and a dud (in the midst of a lively article, the overwhelming large part of which is excellent, but the dud bit tarnishes it).

First, here is yesterday’s gem, untarnished in its amusing brilliance, quoted by from The National Review, 22 January, by Bennett Owen:

And Grandpa provides yet another piece of political humor - the six miracles of socialism:
- There is no unemployment, but no one works.
- No one works, but everyone gets paid.
- Everyone gets paid, but there's nothing to buy with the money.
- No one can buy anything, but everyone owns everything.
- Everyone owns everything, but no one is satisfied.
- No one is satisfied, but 99 per cent of the people vote for the system

I like that. Fifty-nine words worth more than a picture could paint or a thousand words could possible improve upon!

But now for the tarnished dud in the post:

Giving Thanks for Capitalism, The Invisible Hand, the Miracle of the Free Market and No Turkey Czar”, HERE:

"You probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year, did you? Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

And the reason your Thanksgiving turkey was waiting for you? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." Even if turkeys appear in grocery stores every Thanksgiving only because of the "selfish greed" or "corporate greed" of turkey farmers and/or supermarkets, it sure works for me.

In a 2003 Boston Globe column titled "Giving Thanks for Capitalism" (available only in the paid archives) Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes turkeys automatically available so efficiently at Thanksgiving:

“No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn't have to do anything but show up to buy it. If that isn't a miracle, what should we call it?

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure."

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth?

As economist Steven Landsburg wrote in "Armchair Economics" about the invisible hand: "It is something of a miracle that individual selfish decisions lead to collectively efficient outcomes

Apart from Adam Smith not ascribing the metaphor of ‘an invisible hand’ to markets, used only once in Wealth Of Nations in Book IV, but not at all when discussing how markets in commercial societies worked in Book I and II.

See my downloadable paper, “Adam Smith and the Invisible Hand: from metaphor to myth” (see Lost Legacy’s Home Page and follow the instructions).

The ascribing to ‘Heaven’ or God’s (is that the Judeo-Christian or the Muslim God?) direct intervention in procuring turkey dinners to a ‘miracle’, is pure nonsense (and, no doubt is offensive to those who buy drugs instead of turkeys and end up in the earthly version of hell).

Adam Smith did not call it "the invisible hand"; it may be a commonplace among some individuals “to speak of seeing God's signature in” markets by analogy with spider’s webs, but it is not a scientific explanation of what makes turkey farmers get up each morning and go to work of producing turkeys for Thanksgiving.

From the sublime to the avaricious, Professor Perry leaps to "selfish and corporate greed" as the explanation for turkeys turning up on the shelves for sale, and absolves those afflicted with these vices with the blessings of doing God’s business to “promote ends that benefit many”. There is no vice in seeking to buy what your family need for Thanksgiving from people willing to sell the means, so that they can feed and cloth their own families. Self-interest is not selfishness nor greed. It is a virtue.

But what a theological mess the introduction of God, heaven and miracles causes if the society requires selfishness and greed!

But the economist need not burden herself with this mumbo jumbo. Markets do not work on miracles – a flimsy force for sustainable food security – and an ahistorical perspective to boot.

Early humans, sitting around a small fire and in hunger, looked up when they heard the scavengers and gatherers returning to camp, bringing with them arms full of nutritious meat and marrow bones, plants, leaves and berries, and, in their pusillanimous superstition and credulity, they may have praised their stone or wooden sacred gods in their ‘thanksgiving’; but there was nothing sacred, or miraculous, about their good fortune.

The same processes which sent the scavengers and the gatherers out that morning and (may have) resulted in the successful search for food, are the same which sets the turkey farmers to work – if they don’t work, they don’t eat (or today, earn what enables them to do so).

Economists who resort to miracles, hand of god, and heavenly-providence type of non-explanations for markets, pander to their own smugness of keepiogn the truth to themselves, because without doubt, Professor Perry, and the many others who do so, are quite aware of how markets work (as did Adam Smith in Books I and II of Wealth Of Nations).

I think it better – and more respectful – if we economists tell ’em how it is, and not indulge in pandering to their credulity about pseudo-babble.

However, for reminding us about the six 'miracles' of socialism, Professor Perry is forgiven...

Labels: ,

Wednesday, November 26, 2008

Neither Laugh Nor Weep, But Understand

Stephen Zill writes on “Economics for Everyone: Whither Capitalism? U.S. system waning?” in La Voz Weekly (the voice of Anza College) HERE:

But first, let's get a few things straight: for one, pure free-market capitalism (henceforth simply "capitalism") has never existed; not here in the U.S. or anywhere else. A pure capitalist economy would have little role for government beyond much like that of a referee - to enforce the established "rules of the economic game."

Perhaps the closest example of pure capitalism we have ever seen was Industrial Revolution Era England. And it may come to a surprise to many of you that the U.S. is not the freest economy on the planet ¬- and by freest, I mean the least government intervention in the economy (according to the Heritage Foundation, Hong Kong currently holds that distinction as it has for the last 14 years).

Among its other features, the capitalist system is characterized by "markets" (do we really need to define those again?). In a pure capitalist economy, the questions pertaining to how and what goods and services get produced and who receives those goods and services is answered - or any problems that may arise are solved - in the market place, and with no government involvement.

… the conservative magazine National Review featured a drawing of a weeping Adam Smith (the "father" of free-market capitalism) and the words, "Adam Smith's Lament."

Stephen Zill writes a readable piece for a college magazine and it would be somewhat churlish to go through it line by line as if he had written for an academic journal. But to the extent that he reflects fairly common views about economics and the current crisis, I would like to pick up on an idea he has expressed, if only to correct aspects of this common view.

I start with the last quoted line about Adam Smith ‘weeping’ in a supposed ‘lament’ for ‘free market capitalism’. Allowing for rhetorical licence, Stephen misunderstands what Adam Smith’s approach to his work as a philosopher was about. He was not a proselytizer, visionary, a ‘man of system’, a man with a mission, not was he emotionally involved with his subject. He was a moral philosopher whose self-stated role was to ‘do nothing, but observe everything’.

The accolade, it is such, of being ‘the "father" of free-market capitalism’ was awarded two hundred years after his death in 1790 by modern economists with their proselytizing axes to grind, who share the unenviable status of neither thoroughly reading Adam Smith’s works nor understanding him. Quotations from them do not count; imputing their modern concepts to Adam Smith do not count (and is dangerous), and associating him with modern capitalism, a word and a phenomenon not invented until 1854, is quite absurd, and doesn’t count.

Why should Adam Smith ‘weep’ over a monetary ‘crisis’ in today’s economies?

He didn’t ‘weep’ over the direction taken by successive governments in respect of their commercial economies from the 15th century onwards. He analysed them as a philosopher and identified the source of their ‘mercantile’ errors – hoarding of gold and silver, instead of growing their real economies; their ‘jealousies of trade’; their political and sometimes – too often – their military contests; the monopolistic spirits of sovereign legislatures and the men who influenced them; the in-depth idiocies of their laws of primogeniture and entails; the Acts of Settlement; the monopolies of the Guilds; the Apprenticeship Acts; Chartered Trade Companies; wars for trivial ends; and the encouragement of chartered colonies that cost too much to defend and distorted the domestic economy.

All of these would have been a greater cause of distress to Adam Smith if he had been so inclined. But he wasn’t.

He observed and wrote about how they affected the wealth of nations; how the country could be so much more conducive to growth and the consequent opulence that would follow, particularly in the spread of opulence to working men and their families that constituted the greater part of the population.

Whether Stephen Zill’s assessment of ‘pure market capitalism’ applies today, or has ever applied, is not relevant to Adam Smith’s political economy, which never included advocacy of laissez-faire, or complete non-intervention by government.

Wealth Of Nations covers a formidable agenda for government intervention (he felt Britain’s wars cost far too much, given the ‘mediocrity of its circumstances’ which could be better spent on infra-structure development to facilitate commerce, defence of the island against barbarian invasions, the maintenance and application of the instruments of justice, based on liberty, and the education of people of all ages.

The fact that US commentators have never understood what Adam Smith was about is the main cause that fuels the media’s treatment of the current crisis in the way that they do.

It has nothing to do with how modern capitalism in its varied forms has developed historically to where it is today. It is that subject that Adam Smith would be interested in and not how it relates to some pure notion of how it ‘ought’ to be.

He would neither weep nor laugh about things as they are – he would try to understand them from his historical perspective, and pass them on to all those who were interested.

Behaviours, Not Rationality, Drive Markets

Peter Foster writes on “The dangers of behavioural economics” in Financial Post, Toronto (25 November) HERE about the alleged dangers of big bonuses on decision-making – apparently they are do not improve performace. (For the details, follow the link).

Peter Foster writes:

What is perhaps most fascinating about the rise of behavioural economics is that it reminds us that “conventional” academic economics somehow became sundered from human nature. We might remember that 17 years before he published The Wealth of Nations, Adam Smith published The Theory of Moral Sentiments. Smith never for a second imagined that humans were rational calculating machines. Similarly, the greatest economists of the twentieth century — von Mises, Hayek, Schumpeter and Keynes — all regarded homo economicus as a nonsense. Keynes was the odd man out, however, because he believed in an even more fanciful construct — homo politicus — a brilliant individual motivated solely by the public good.

The power of the market meanwhile does not derive from human rationality but from the fact that it rewards or punishes commercial behaviour on the basis of its contribution to society. It is doling out a whole mess of punishment right now, despite the attempts of government to shove cushions down everybody’s shorts.

Man is fatally flawed and periodically subject to Extraordinary Popular Delusions and Madness of Crowds, but a far great delusion is that there is a political solution to his shortcomings.

Unfortunately, behavioural economics is regarded as a new tool with which our political masters might improve us. That is far more potentially damaging than the most elaborate of bonuses.”

On the whole I agree with Peter Foster in his disdain for the fanciful theories of Homo economicus and Homo politicus, because I am not too fond of the idea of human rationality driving all behaviour in the economic models common among modern economists, other than in the sense we can rationalize any decision into it being rational for that person in those circumstances.

The fad for ‘explaining’ why some (it’s always some, never all, though the obvious caveat is often ignored in the admiration of the ‘rationalist’ for the beauty of the alleged explanation) behaviour can be seen to be ‘rational’.

For instance, teenage girls becoming pregnant is supposedly a rational search to qualify from welfare payments (but why don’t all girls who might believe they would benefit from welfare become pregnant?), or teenage boys develop criminal tendencies to enhance their prestige among their peers (but why do so many more boys in the same circumstances of broken families, slums, unemployment and poor education, not become criminal recidivists?).

Of course a ‘rational’ explanation for these girls and boys not covered by the initial explanation can be advanced too on other grounds, but if every variation is ‘rational’ too then ‘rational’ is no longer the explanation. People do what they do because that’s what people do when they do whatever they do!

Markets are the net effect of all behaviours, not just rational ones. And many of these behaviours are not captured in the rational calculus. Adam Smith understood that truth.


Tuesday, November 25, 2008

In the Home of the Enlightenment

I stepped out of my comfort zone today to attend a conference at the Royal Society of Edinburgh (founded 1783; Adam Smith was a founding member (he was already a member of the Royal Society of London since 1773; he was admitted as a fellow in 1767).

The occasion was the commemoration of the great Scottish Physicist, James Clerk Maxwell, by the unveiling of a statue to him in George Street, Edinburgh, just along from the RSE building. The RSE represents the prime members of the Scottish scientific community and I found the talks of immense interest.

Without the mathematics of James Clerk Maxwell on the electronic spectrum, the immensely practical work of others would not have been possible that took society into the electronic age. The maths are difficult, but the benefits have been enormous. Would that we could say the same about maths in economics; electrons and atoms are well behaved, but people are not.

I reflected while listening, and later while discussing with several scientists whom I recognised, on the wonder of James Clerk Maxwell's work that led to so much of great benefit all around us, compared to the predictions and policy reocmmendations of economists - the British Chancelor giving precise predictions of when growth will return to the UK in the third quarter of 2009, a prediction few are rash enough to be so precise.

Mathematics that assumes order where there is precious little evidence of it is no security that the predicted will happen. Economists who desparage history have cause to be more modest in their certainties.

Monday, November 24, 2008

Melbourne 'Discover Capitalism' Club Sounds Most Interesting

A Blog advertising a discussion group announces an event entitled:
"Comparing Adam Smith & Ayn Rand on The Moral Foundations of Capitalism"

The text about the discussion announced the background to the event:

Our goal will be to identify
1. All the ways in which Adam Smith and Ayn Rand are similar
2. All the ways in which Adam Smith and Ayn Rand are different

Timothy Warner will present the basics of Adam Smith's approach.

Prodos will present the basics of Ayn Rand's approach.

This will not be a debate - but a careful, thoughtful, and thorough exploration; a mapping out of the terrain of each Thinker's thinking.

Many people treat Adam Smith's Wealth of Nations as a stand-alone defense of the Free Market. However, without a proper grasp his earlier work, Theory of Moral Sentiment, it is simply not possible to fully appreciate where Adam Smith is coming from and what he really means.

My research indicates that the term "the invisible hand" first appeared in Theory of Moral Sentiments (first published in 1759) - not in Wealth of Nations. But I'm still checking on this.

Most of us know Adam Smith as an Economist - as the father of Economics. Few are as versed with his work on Moral Philosophy. I believe you'll find Tim Warner's depth of understanding and clarity of communication on all things Adam Smith very strong.
Ayn Rand is more widely recognized as a moral philosopher and as an advocate of a particular kind of morality - one which explicitly leads to the advocacy of Free Market Capitalism.

She once wrote: "I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows."

Free Market Capitalism "follows" from Ayn Rand's epistemological and moral premises.
Free Market Capitalism "follows" from Adam Smith's epistemological and moral premises.

Are the two approaches compatible? If so, to what extent? Where do they diverge? Are any differences due to different views of Man? Of thinking? Of happiness? Of human relationships? Of the nature of reality? What does each thinker treat as most important or least important?”

There are many, many questions to explore. Come armed with your own! It's going to be a super evening! I look forward to your passionate intellect

It really sounds a worthwhile event and if scheduled on a regular basis it would be worth attending regularly (I assume the subjects discussed at the meetings change each time). On these grounds its sponsors and attendees appear to be serious people and similar in kind to regular readers of Lost Legacy.

Unfortunately, the discussions are not within easy reach of Edinburgh because the Club, ‘Discover Capitalism’, is in Melbourne, Australia. Any reader who knows of the club would be most welcome to inform Lost Legacy of its qualities, especially as it holds to the following principles for the conduct of its debates:

Our members come from a wide range of politics and ideology within the pro-Capitalism spectrum, including: Conservative, Classical Liberal, Objectivist, Christian, Atheist, Libertarian, Liberal Party of Australia. Discussions are friendly but vigorous. We take ideas (and good manners) seriously!

The nearest we have in Edinburgh to the Melbourne Club is the ‘Tuesday Club’ (to which dinner meeting I shall attend tomorrow evening – Tuesday, 25 November), which has a stimulating procession of good speakers and a club ‘rule’ that all attending are expected to speak in turn after the main speaker’s discourse, all over an excellent dinner.

While the Tuesday Club is ‘right of centre’, it is not homogenous in its views, and nor are its speakers. Last month’s was delivered by a senior ‘spin’ manager from the UK Labour Party’s cabinet-level-team of ‘spinners’ – and very thoughtful he was too in making the ‘Unionist’ case against Scottish independence. Being chairman for the night, I stuck to a self-denying ordinance not to speak, especially as long speeches by some members were followed by long responses albeit of excellent quality from the speaker.

However, if I ever get to Melbourne (again) I would hope to attend a meeting of the ‘Discover Capitalism’ club, unless I am told by Lost Legacy readers that its actual practice is different from its billing.

Meanwhile, members of the 'Discover Capitalism' club may want to discover something about Adam Smith and his Works from reading Lost Legacy regularly between their meetings.


Sunday, November 23, 2008

Real Wealth

From Airllelon’s Investing and Trading Blog, complete with video links to U-tube-style pieces by the author (HERE) I find this piece:

"Week in Review: The Death of Keynes Mercantilism?"

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country" - Adam Smith

For decades now, Keynes has been held as the pinnacle of "capitalist" thought, and the latest in the evolution of what started with Adam Smith.

There's only one tiny problem with that little concept.

Keynes was no capitalist. Keynes ideas are a direct descendant of everything that Adam Smith opposed. Keynes ideas are a descendant of Mercantilism. Capitalism isn't dying, because Capitalism hasn't been practised. Keynes Mercantilistic thoughts and theories are what are dying.

Keynes firmly supported concepts found in Mercantlism. Which is that government should work in partnership with private companies.

In a Capitalistic society, there can be no lobbyists.

In a Capitalistic society, governments do not work as partners with private industry.

In a Capitalistic society, private industries do not seek capital from the government when they are doing poorly

To quote a phrase, “there’s only one tiny problem with that little concept”. The author of the piece goes on to recommending to readers that they buy silver, not gold, because silver is doing better at present, which is partly exactly what Smith considered was a central fallacy of ‘mercantile political economy’!

Gold, silver, and cash money are not wealth in Smith’s eyes. They are illusionary wealth by being stored claims on the real wealth. They do not create wealth in themselves. Hording gold or silver will not add to the wealth of nations.

Wealth according to Adam Smith was the ‘annual output of the necessities, conveniences, and amusements of life’, or the real goods and services of consumption, and working capital.

Revenues from engaging in productive work can be spent on final consumption or re-invested in future productive employment; the balance between these ends determines whether growth in the next period’s annual output of real wealth occurs.

Too much prodigality in consumption and too little in re-investment is not good for an economy, or the people in it. Hoarding metallic ‘symbols’, such as gold and silver is a psychological comfort to individuals but does nothing for the economy. Printing more money is not a substitute for generating the means to produce real wealth when it is disconnected from the real economy; too much printing leads to inflation, not more real wealth (see Zimbabwe).

Strong boxes, protected vaults, brim full of gold and silver, are sterile unless part of the great wheel of circulation that puts to work real resources, primarily labour, capital, and work in progress.

Adam Smith did not write about ‘capitalistic’ society – that came later in the mid-19th century. Long before the commercial entities in the 19th-20th-21st centuries sought governmental help for whatever mess they were in, powerful entities in ancient times sought relief of various kinds from their states, usually in the form of retribution against former clients and competitors, punitive expeditions, revenge missions, armed interventions and lucrative supply contracts. Emperors, kings and ‘strong’ leaders, also sought help from traders – sometimes as excuses to intervene with neighbours in pursuit of plunder and tribute, and colonies and empires.

What is needed by those who write about the ‘perils’ of modern capitalism and modern states is a little more historical knowledge beyond what they apparently misunderstand to be the unique behaviour of the current age. Unless they are only interested in selling their 'solutions'...

Labels: , ,

Saturday, November 22, 2008

Adam Smith Is Innocent

F. Meekins writes about “Nation's Capital Implements Measures Violating Rights & Property” in Red State HERE.

I found yet another ludicrous example of the effect of decades of brainwashing that creates the self-deluding consequences of repeating a mantra made up by otherwise deserving top-class economists, some of them Nobel Prize winners, and daily – hourly! – mimicking in the media by epigones (and not just a few hacks), who assume that if something is said often enough, it must be true, but sadly for them it isn’t.

I refer to the invention of a myth, albeit a myth with the authority of Adam Smith’s name on it, namely that there is a mysterious, almost Divine-sourced force, called by modern economics a ‘concept’, a ‘theory’, a ‘paradigm’ even, known (short gap for sound of trumpets) as ‘the invisible hand’.

Here is the offending sentence:

According to social planning, the new urbanism, sustainable development, or whatever other flurdelore you want to dress it up with, it is no longer satisfactory to allow concentrated areas of population to develop, expand, or contract in compliance with forces attributed to Adam Smith’s invisible hand.”

‘Attributed’ by whom? Certainly not by Adam Smith! See Lost Legacy archives for detailed rebuttals.


Mystery Claim from India

Sundara’ writes in Timepass (21 November) HERE:

Why TATA is branded as an Indian company?’, which contains this paragraph:

According to Adam Smith's absolute advantage in any trade that involves more than one country, it can be seen that one country gains and the other lose. Thus the countries which exports raw materials and basic services and imports high tech service which are costlier than then exports the country does. Thus the company holds the brand identity of India to the world thus acting as a gateway to the country. From my point of view this is the main reason for the company to branded as an Indian company.

Whatever the meaning of the paragraph intended by its author, ‘Sundara’, the reference to Adam Smith on ‘absolute advantage’ is mystifying. Smith never said anything about trade making one country gain and its trading partner lose.

Partners in trade always have the option to decline to trade because trade is voluntary. If it isn’t voluntary because for some reason a partner has had the right to veto a transaction taken away, then it isn’t ‘trade’; it's some kind of criminal extortion, which in Smith’s presentation was subject to the intervention of the justice system.

Parties only volunteer to engage in exchange transactions because they believe at that moment that the trade makes them better off in some way. This does not exclude the possible reaction afterwards of 'buyers' or 'sellers' regret.

What the parties gain from a specific exchange is not decided by the money price that they pay or receive; hence looking at cash equivalents alone is futile. The money price is only one element in a transaction and in supply and demand theory, all other elements are held constant.

Apart from this, I still have no idea what ‘Sundara’ is talking about.


Thursday, November 20, 2008

Is Adam Smith 'Disproved' by Ants?

Mark Thoma posts a most interesting article that debates the generality of Adam Smith’s famous opening chapter of Wealth Of Nations on the division of labour. It is prompted by an article on a study of the behaviours of rock ants, which asks: are ants more productive from specialisation?

The report of the research is published too in the New York Times (20 November) with the somewhat extravagant headline, “Adam Smith, Disproved” by HERE by Catherine Rampell. The research was undertaken by Anna Dornhaus: “Specialization Does Not Predict Individual Efficiency in an Ant” (HERE):

It’s worth a look over. Read Chapter 1 of Wealth Of Nations first and then read the research. What do you think? The comments to Mark Thoma's post are also worth reading (selectively, at least).


Another Blog Notices Lost Legacy

A post from Lost Legacy has been picked up by the Blog, Sauce Captain (Economics, Freedom, Behaviour, Sundries) HERE:

‘An excellent post crossed my path today from the blog Adam Smith’s Lost Legacy."


I appreciate people in Blog land finding Lost Legacy posts interesting and worthy of comments. It also introduces Lost Legacy to wider audiences. It might lead some readers to go on to reading Moral Sentiments or Wealth Of Nations too.

Adam Smith on Bargaining

Stephen J. Dubner writes the Blog: Freakonomics (‘the hidden side of everything’) HERE:

The Weirdest Cookbook You Will Ever Need

Shopsin has just written a book that is half cookbook and half memoir, entirely fascinating. I had never sat down and read a cookbook from cover to cover but that is what happened with Shopsin’s book (co-written with Carolynn Carreno). It is called Eat Me. The introduction is a reprint of a New Yorker article by Calvin (Bud) Trillin, a regular at Shopsin’s.

Trillin also figures in a story that Shopsin tells in the book, a story that illustrates the creativity with which we human beings barter and exchange. Gains from trade indeed. Adam Smith would be proud:

I’ve never used cookbooks for recipes, but I do like to read them to get ideas and to see how different cooks do things — and I especially liked doing this way back when I first started cooking. Back then, Bud Trillin used to bring me the review copies of cookbooks that were sent to him. He would bring in a stack of cookbooks, and in exchange I would give him 25 percent of the face value of the books in food credit. It was a great deal for both of us.

*From Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that

Which provoked the following interesting comment from a reader, Michael Sullivan:

The quote from Adam Smith is interesting in that it is, strictly speaking, no longer true. There was a case involving an orangutan at a zoo. The zookeepers came in one morning and found the orangutan in the moat separating his enclosure from the public. They moved the orangutan back to his enclosure, berated the staff for not locking the door and considered the incident closed. The next morning they found the orangutan back in the moat. Thinking that it was unlikely that the staff would forget to lock the door after being berated the previous day, they investigated further and found that the orangutan was using a piece of wire pried loose from somewhere in his enclosure to pick the lock on the door. So, they removed all wire that he could use to pick the lock. This solved the problem, for a while. When they again found the orangutan in the moat, they again investigated. What they ultimately found out was that there was a female orangutan in an adjoining enclosure who was overweight and therefore on a diet. She was giving the male orangutan pieces of wire in exchange for some of his food. I may have some of the details of this story wrong, but the basic point is that there is no way to describe the interchange between those two orangutans other than as a barter transaction, thus disproving the second half of Adam Smith’s statement.” Michael Sullivan

Stephen Dubner is correct in that the exchange between “Calvin (Bud) Trillin” and “Shopsin” is a clear example of the normal exchange common in commercial societies and societies with elements of commerce in their mode of subistence.

The section of Wealth Of Nations from which Dubner quotes is at WN I.ii.2: p 26, and is part of the most important, but under-appreciated passages, in the whole book.

Even in this quote, Smith states the conditional proposition: “this is mine, that yours; I am willing to give this for that.” He follows this up later in the same paragraph:

Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”

On the substance of Michael Sullivan’s comment, I am only partly convinced, not least because Sullivan admits to not being sure of the accuracy of his account of the incident (I would love the read the actual report), but also because I have read various similar accounts of apparent exchange among primates, which specialists claim were coincidental (mainly 'sex' for 'food'), though this exchange of 'wire' for 'food' is exciting in that it appears purposeful.

For those interested some years ago I wrote a ms, “The Pre-Hisrtory of Bargaining”, from which I have presented a version in two-parts, the first part of which I presented at a conference of the “European Association for Evolutionary Political Economy” in Rome a week or so ago. You can read a copy from the Lost Legacy home page (HERE).

This paper looks at Adam Smith on bargaining exchanges and its evolution from exchange behaviours (‘quasi-bargaining’) among the primates, including the evolutionary tracks of the numerous Hominid species to the Homo sapien species as hunter-gatherers.

The second-part, as yet unpublished on Lost Legacy takes the evolution of bargaining through the invention of property – shepherding and farming – to the emergence of commerce.

I believe I show that Adam Smith’s statement of the conditional proposition is absolutely correct and holds today. Presently, I reserve my final views on whether the second part of Smith's above statement is sound or is 'disproven', as Sullivan asserts.

There are several reports of other primates implicitly exchanging in an intentional manner, over which disciplinary experts are divided at present.


Adam Smith on Natural Liberty

Sauvik Chakraverti writes, 19 November, in Antidote, (‘libertarian opinion from Indyeah)’: "Adam Smith... And Marathi Politics’ HERE

The news that the government of Maharashtra has dictated 80 per cent reservations in jobs for locals must be viewed as an Injustice, given that Justice demands a Rule of Law in which there is neither Preference nor Restraint.

This is preferential treatment for locals – and it brings to mind what Adam Smith wrote on the subject. This quote is from The Wealth of Nations:

“All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as 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 those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society

Sauvik Chakraverti's quotation is to be found at WN IV.ix.51: pp 687-8. From what is reported to be happening in Maharashtra the quotation appears to be apt, though I do not know enough about the circumstances to comment authoritatively.

However, Sauvik Chakraverti gives me an opportunity to make a comment on Natural Liberty and Adam Smith.

Adam Smith was educated at Glasgow University in the principles of Natural Liberty, a school of thinking notably espoused by the distinguished lineage of Grotius, Pufendorf, Carmichael, and Hutcheson, and it was taught in the Scottish universities in the 18th century.

Many readers of Wealth Of Nations, however, mistakenly confuse the precepts of Natural Liberty – philosophically an element of moral philosophy – with those associated with laissez-faire economics.

Smith was careful to distinguish the jurisprudential roots of Natural Liberty which was applicable in all societies, independently of their subsistence basis of their economies, from the political economy of commercial societies.

Cointrary to myth, he did not advocate laissez-faire economics though he was familiar with the Physiocratic terminology of some of its members (he met and discoursed with them in Paris and elsewhere, and in correspondence and the exchange of manuscripts but he never used the words laissez-faire in anything he wrote).

Tellingly, he made many references to either curbs on the behaviours of ‘merchants and manufacturers’ and to interventions that he considered necessary by governments to curb the freedoms of some of the same people, of whom he was suspicious of their tendency to act against the interests of consumers. There are over 50 instances of him mentioning the less than beneficial actions of sel-interested individuals in Books I, II and III of Wealth Of Nations.

On such set of commercial entrepreneurs that he wrote extensively about were the bankers of Scotland and the rest of the UK at the time. After a long discourse in Book II, chapter 2, on banking operations and some of managers and customers' dangerous failings on occasion, he drew a line between Natural Liberty and total commercial freedom:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.” [WN II.ii.95: p 324]

I think this is clear enough.

It separates ‘freedom’ as a legal concept and as a practical policy by a qualifying restraint where a person’s freedom has deleterious consequences on the public good.

Clearly, not all individual putsuits of self interest necessarily and unintentionally benefit society; hence mythical theories of the invisible hand imposed on Adam Smith by 20th-21st century economists are a manifest violation of Adam Smith’s intellectual integrity and a gross abuse of his legacy. In short, a violation of his Natural Liberty rights.

My thanks to Sauvik Chakraverti for creating this opportunity to comment on this important distinction.

Labels: , ,

Wednesday, November 19, 2008

Adam Smith Always Chose Prudent Discretion

Andy Guess writes a report of an academic meeting in Inside Higher Ed HERE:

Walter Block, an economics professor at Loyola University, New Orleans, a Jesuit institution, gave a talk this month, “Injustices in the Politics and Economics of Social Justice,” at Loyola College in Maryland, a fellow Jesuit institution.

When Austrian Economics and Jesuit Theology Don’t Mix”

“Loyola College’s president, the Rev. Brian F. Linnane, e-mailed students: “While economics faculty members have issued a response and apology, I feel it is important at this time to remind all members of the Loyola community that while our commitment to academic freedom ensures that we welcome students, faculty and guest speakers of all academic and political perspectives, we will not endorse or support racism, sexism or any other form of intolerance.

“We are a Jesuit institution, and as such, a respect for diversity is one of our defining values, and an essential component in our commitment to preparing men and women to become leaders in a rapidly changing world made all the more rich by the many cultures and viewpoints that shape it.”

Perhaps almost as notable as the president’s direct response was the condemnation issued jointly by the college’s economics department and the Adam Smith Society student group, which is named for the 18th-century free-market economist. In an unsigned letter to the student newspaper, members of the department wrote, “It is important to note that the remark was offensive not just because it was racially insensitive, but because it was erroneous and indicated poor-quality scholarship. There is ample scholarly evidence that, after adjusting for productivity-related characteristics (e.g., years of schooling, work experience, union and industry status, etc.) a considerable wage gap remains.”

Block, who is also a senior fellow at the Austrian-oriented Ludwig von Mises Institute, said in an interview that Smith would be “spinning in his grave,” and that he may include the incident in a book he is writing on racial and sexual discrimination, to be published by the Institute

Adam Smith worked as an academic philosopher in a society largely devoid of free speech and academic freedom in the sense that neither he nor his colleagues could speak freely on matters of religion for example. David Hune did and paid the price, refused chairs in both Edinburgh and Glasgow Universities.

Meanwhile, they could, should they wish, make outrageous statements denigrating Africans and in defence of slavery. This latter didn’t change too much right into the 19th century.

Even gentlemen and much lauded scholars such as Thomas Carlyle could publish a pamphlet in 1848 ‘On the Negro Question’ (an absolutely disgusting pamphlet which would shock many devoted admirers of Carlyle).

I have given Carlyle’s pamphlet its polite title; an edition of it was titled ‘On the Nigger Question’. It was also the source for Carlyle’s most famous slur on economics as the ‘dismal science’ which he directed at J. S. Mill for his defence of recently liberated black slaves in Jamaica being as human as Europeans, and which an ‘urban myth’, presumably in ignorance, keeps linking Carlyle’s comments to Malthus and Ricardo and not to his own putrid views on race.

I am not clear why Adam Smith would be ‘spinning in his grave’ (a common claim, twice this week already!) over this incident.

Smith certainly had harsh things to say about the slave trade and the jail-refuse who undertook it and about the futility of the economics of slavery. He thought all men were born with the same capacities – the famous ‘porter’ and the ‘philosopher’ example in Wealth Of Nations – and that it was education that made adult differences possible, plus of course birthrights from the ‘right’ parents.

For reasons given above, he was more exercised by threats to Liberty than the absence of democracy. He participated in some student unrest whilst at Glasgow University as an undergraduate 1737-40 over the local religious zealots hauling their much beloved Professor France Hutcheson (an ordained minister in the Ulster Protestant Church), before a Scottish church court on the absurd charge of apostasy. In his adult professorial and writing life Smith avoided prudently any controversy with the then ‘thought police’ in the church by not provoking them, though I believe he cocked-a-snoot at them by the use of very careful language when mentioning religious subjects in Moral Sentiments, they being too ignorant to see through his rhetorical skills in using underwhelming apparent endorsements of religious orthodoxy (my current research project).

Professor Block answered a question under the assumed protection of his right to free speech; his detractors presumably consider themselves also to be protected by the same right. As long as neither side threatens the other side’s rights, all remains well. But if one or both sides go beyond their rights to threaten the other side’s rights, all is not well.

Adam Smith had a greater respect for the absolute need for justice than for the right to silence one’s opponents by barracking, boycotts, civil disorder, and righteous conduct that denies others their rights.

The Loyola community is a long way from the extremes which these sensitive-issue disputes tend to go eventually. I trust it will pause and reflect, having made its views known and now leave Professor Block alone and the good Professor might stay in New Orleans and not venture back to Maryland to re-ignite the flames on the grounds that where ignorance (of the mores of civilised intellectual discourse) predominate, common vulgarity asserts itself.


Tuesday, November 18, 2008

Remember Human Nature!

Richard Larsen writes in Ventura County Star (Camarillo, California) HERE: ‘Adam Smith must be turning over in his grave’

What these free-market mystics believe in is the ideal, and that can work in theory. Even communism in its ideal form could work, except for the one tiny thing that plagues every ideal — people. People find ways to alter an original concept and use it to their advantage and against others, a sort of reverse redistribution of wealth — from the great masses to the wealthy few.

And capitalism and communism have been two concepts heavily altered by the people who embraced them. Communism failed. Do people really want to consider capitalism and its free-market system so sacrosanct that any failings go unchecked?

The capitalism of today is markedly different from the capitalism espoused by Adam Smith, a Scottish moral philosopher and a pioneer in political economy. Though he never used the word "capitalism" in his "An Inquiry Into the Nature and Causes of the Wealth of Nations," published in 1776, Smith is considered by many to be the father of capitalism.

The core theory of capitalism is that a vibrant marketplace with the means of production and distribution privately owned would create jobs, quality products and a sustainable economy. Competition would assure low prices while a strong work ethic and pride of ownership would assure adequate wealth for all

Richard Larsen is right: Adam Smith did not write about capitalism (a word invented in 1854) and the fact that some people believe him to be the father of capitalism does not a fact make, in fact!

There was a lot more to the market commerce that Adam Smith wrote about than is generally passed for ‘free markets’ by propagandists of the status quo.

Smith’s works were embedded in the society of Britain in the mid-18th century, of which he had considerable criticisms, many of which have not been acted upon even by the 21st century.

We are still debating in serial world conferences about freeing world trade from its current levels of protectionism, of which the most advanced market economies continue to be powerful protectors of their own trades!

David Hume’s ‘jealousy of trade’ still stalks the lands of the richest countries on earth, and, it must be said, are alive and well in the richest and poorest of the developing countries too.

Cartels of oil producers survive (what happened to the theory of cartel instability?); administered exchange rates are sometimes set by bureaucrats not by markets; vast government spending and revenue raising agenda continue to dominate the world’s economies on a scale never remotely akin to ‘big spenders’ like 18th-century Europe in both secular democracies and pretend ‘democracies’, and outright tyrannies too.

And on the role of real ‘people’ – strangely absent from most modern economic models because aside by ‘rational’, ‘consistent’ and ‘predictable’ Home economicus, a bogus ideal invented in the late 19th century and perfected into almost religious belief in the mid-20th century – assumed away.

People, real people, feature in all of Adam Smith’s works and their influence on events is, to coin a phrase, highly visible, and without illusions on Smith’s part, he reported that if left to themselves they still have to contend with those among them who interpret their self interest in a manner not allowed for in modern economic models, not out of their ignorance, but precisely driven by their native intelligence.

That’s why Adam Smith made such a play about the need for justice in any society, barbarian or opulent.

I was at dinner last night with three distinguished economists and I remarked during one conversation that human nature is the one universal constant we can be certain of when contemplating any economy, including its forms of government.

Labels: ,

Monday, November 17, 2008

Smith Knew the Differences Between Self Interest and Selfishness

There is much in the media at present that attempts to draw easy conclusions about the causes of the current financial crises, often of a kind that finds the sins of commission in the commercial market system and the virtues of omission in the state sector.

Hardly, a day goes by when we are not lectured on the ‘end of market capitalism’ and its replacement by what amounts to state capitalism. Fair enough, it’s a free country in this constitutional monarchy and in the largest capitalist market economy, the United States of America.

However, the constant drum beat of nonsense about self interest as taught by Adam Smith, frankly is tiresome because it is so untrue that he didn’t know the difference or, worse, ‘changed his mind’ in Wealth Of Nations, that I think it worthwhile to note something he wrote in Moral Sentiments in a discourse on the effects of a supposed earthquake ‘the great empire of China’ and how a ‘man of humanity' might react to an event, then about two years return distance away by sailing ship.

I have quoted the first part of the discussion several times on Lost Legacy, mainly, perhaps in vain, to correct scribblers who draw the absolutely wrong conclusions from it, namely they calim that even a man of humanity would prefer to save his little finger, of immediate, close and personal interest to himself, rather than save the ‘ruin of a 100 millions of his brethren’. Many quote this thought experiment of Smith as if he concludes the triumph of the ‘man of humanity’s’ sselfish elf-interest over millions of earthquake victims.

They are totally wrong. They should have read on:

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.3.5: p 137)

If that is not a final and devastating rebuttal of the ‘selfish greed’ libel against Adam Smith, I don’t know what he could have written in its place.

'Geko’s', ‘greed is good’, outburst slipped in for dramatic affect of a Hollywood script writer did not come from anything that Smith wrote. They expose their ignorance those who claim he did.

They confuse Bernard Mandeville’s satire of [1705-1732] 1924, 'Fable of the Bees, or Private Vices, Public Benefits’, (Oxford University Press) with Smith’s writings from 1744 to 1790 (Mandeville died in 1733; Smith was 10). Now, of course, Smith knew of Mandeville’s writings; he described them as ‘licentious’ in Moral Sentiments (TMS VII.4: pp 306-14).

The piece quoted above from Moral Sentiments is clear and unequivocal.

Labels: , ,

Fear and Greed in City Markets

David Freud, an adviser to the Government on welfare reform and author of “In The City”, Bene Factum Publishing, writes in Mail online, 16th November 2008 (HERE)

Crisis caused by lack of fear, not too much greed”

'It's all about fear and greed,' a hardened trader at the investment bank for which I worked told one of my trainee analysts in the Nineties.

It was the standard rough and ready explanation as to how share prices are constantly poised between concerns about where they will move next.
We had the lesson printed on some T-shirts and wore them on lively days in the market.

Greed has had a mixed press over the ages.

One of the Catholic Seven Deadly Sins since around the year 400, its iniquity was badly undermined by the famous economist Adam Smith's theory of the 'invisible hand', which promoted the notion that individuals may well help society most when they act in their own self-interest.

The arcane debate about where to draw the line between 'self-interest' and 'greed' is about to become considerably less theoretical as the City braces itself for the inevitable regulatory backlash to the current financial crisis.

'Greed' has been blamed for the avalanche of debt that has built up in recent years and which is the base cause of the crisis now overspilling from the financial markets into the general economy.

In practice, it is self-interest and the desire to make a profit that drives business activity across the whole economy, just as much as in the City, although the City tends to reflect those forces in more primeval form.

It is not because we have had too much self-interest, or greed, that we have hit this crisis but because we have had too little fear


I was immediately unimpressed by the theme, partly because last month I refereed an excellent manuscript on the economics of defence entitled in part, ‘Fear or Greed’, which title is plausible for a catchy tv chat show, or to a late-night discussion about war fighting in an officers' mess, and partly because David Freud’s piece repeats the usual nonsense about “Adam Smith's theory of the 'invisible hand'", a wholly contentious assertion regularly refuted on Lost Legacy (new readers may scroll down this month’s postings for evidence – or visit any monthly archive if not convinced; better still read Wealth of Nations!).

Given that Adam Smith did not mix up self interest and selfishness (this is absolutely clear in Moral Sentiments and in Wealth Of Nations) that part of Freud’s thesis is redundant as far as Smith’s role in concerned.

Those modern economists who incorporated their own theories of mystical invisible hands and markets in their 1950s general equilibrium mathematics maybe have much to answer for but Adam Smith is in the clear.

I leave the extent to which the catchy though incorrect title claim applies to the City of London, and to sports fans or gamblers generally.


Sunday, November 16, 2008

Self Interest and Selfishness

Simon Caulkin, management editor, writes in The Observer (UK), 16 November, HERE:

Guess what? Self-interest is bad for the economy

Self-interest as the driver that, like an invisible hand, permits individuals acting on their own behalf to benefit society as a whole goes back to Adam Smith. But Smith at least realised the drastic inequities it would cause and proposed measures, including progressive taxes, to mitigate the worst effects. No such caution has been in evidence since the 1960s as the concept has become the central belief around which all Anglo-American corporate governance, and thence management as a whole, revolves.

“Not so in economics, whose central tenets - rational agents, the invisible hand, efficient markets - derive from economic work done in the 1950s and 1960s, 'which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused on the short term and blind in the long term, and errors get multiplied, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets' - for which classical economics has no framework of understanding.

“It's an error to think that management, or even economics, can ever be a 'hard' science, not least because of their self-fulfilling premises. That doesn't mean they are unworthy of study and understanding. On the contrary. But, as Greenspan sorrowfully acknowledges, the first step on that path is to bow to empirical observation and stop trying to prove the Earth is the centre of the universe

Simon Caulkin confuses self interest universally benefiting everyone unintentionally, as an idea of Adam Smith’s (he asserts that the idea ‘goes back’ to him), when in fact Smith gave an instance of this happening when merchants preferred to invest their capital locally rather than send it abroad (Wealth Of Nations IV.ii.9: p456).

He also said this happened in many other instances, but he did not say this was a universal consequence of all individuals pursuing their self interest, ‘enlightened’ or otherwise.

Smith had a fine sense of history and he knew the difference between self interest and selfishness. In fact, he gives over 70 other instances in the Books I, II, and III of Wealth Of Nations where individuals exercising their the self interest had consequences that were anything but beneficial to society as a whole.

The merchants above were activated by their risk avoidance; they didn’t need an invisible hand to lead them to avert avoid adding to their risks. Smith used the metaphor as a literary device, not as an instrument of social behaviour.

The belief that there were invisible hands ensuring that thereby anything done by corporate bodies benefits society was “more like propaganda against communism than plausible science” is half right, though ‘communism’ was not the target; it was more positive than that. It was propaganda, alright, but not just by corporate-minded economists in favour of their clients being given a free hand to do whatever they wanted; it was also, and mainly, an attempt by mainstream economists to legitimise their mathematical models of general equilibrium.

Labels: , ,