Saturday, January 31, 2009

A Reckless Optimist Writes

Pete Murphy posts on Five Short Blasts Forum HERE:
His recent post is on “Clumsy Trade Policy” and it expounds a new theory of ‘safe’ protectionism by weighting tariffs on manufactured goods by an index of the population of a country – the larger a country’s population the more the imposed tariff. It's not difficult to work out who he is aiming at.

His assurances are also predicated on a ‘hope’ and ‘assumption’, but not much more, namely that countries (I see Germany is included!) affected by a substantial fall in their exports to the USA would not retaliate.

History shows that there is no fire-safe way in which imposing tariffs is ‘safe’ from retaliation, and retaliation is more likely when there is economic distress, of which all affected parties are aware. It called a ‘beggar thy neighbour’ strategy. Moreover, all US trading partners will be aware of the aims of the policy – they read the US press, watch Fox News and CNN, and their diplomats keep tabs of Congressional Debates.

The open and obvious aim of such a tariff policy is to improve the fortunes of the US while necessarily worsening the economic performance of those upon which the weighted tariff policy would be applied.

Pete Murphy includes these assertions in his post:

The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong - culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application - like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.”

And:

Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.”

Comment
The trade policies of the US (which are not free trade) are not there because of what Adam Smith wrote in 1776 or David Ricardo wrote in 1817 (that gives far too much credit to them); they take their current forms because it is in the interests of the US to apply such policies.

I should think that international trade policy is the most researched area of economics imaginable, from all sides of the arguments about it, from people of significant standing in the subject, plus not a few ‘scribblers’ who believe they have spotted some missing element the theory and practice of internation trade (I remember as a student almost only having time to read the titles of all the books and articles written on the topic, never mind their contents) backed by endless econometric analyses, in what thousands of these lifetime-scholars did not manage to spot, in two or more hundred years.

International trade is highly political, and has been since medieval times. European countries went to war many times with neighbours over all kinds of issues, including the trivial and the momentous, and trade relations were often the cause of, first ‘jealousy of trade’, then angry resentment, and almost always in the spirit of mere speculation by scribblers about which side would ‘win’ as a result of the contest of arms, or a contest of those surrogate arms, called tariffs and retaliatory prohibitions. Trade wars are not a one round game.

Pete Murphy describes his proposal as “an elegant approach that’s rooted in logic”, which he assures readers “can avoid the unnecessary collateral damage of a trade war”.

It’s a safe bet he is wrong.

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Sociability and Human Evolution

Darwiniana Blog (30 January) carries Freedom Evolves! Huxley’s Evolution #2: ‘We have discovered Huxley ’s evolution #2HERE:

This ‘survival of the fittest’ aspect is, in any case, demonstrably false of man’s social experience, as the mechanism of cultural evolution. Thus extreme competition is met by the response of social law in the evolution of civilization, if not economy. And the place of Adam Smith here is entirely complex and misleading, this philosopher being a de facto source of a new ethics, even as his work is polarized between an economic and moral dimension. Survival of the fittest business firm is simply another process, as is the tonic of Olympiad sports competition. The issue of evolutionary causality in the study of the evolution of civilization has been so confused by assumptions of material causative motive, as in the imputation of economic determinism, that the real evolution of social cooperation seems to have been forgotten. In general, theories of evolution must themselves interact with the near future of all free action, in a confusion of external observer, and temporal participant, ‘acting out theory’.

Comment
The issue of evolutionary causality in the study of the evolution of civilization has been so confused by assumptions of material causative motive, as in the imputation of economic determinism, that the real evolution of social cooperation seems to have been forgotten.”

Crude applications of evolution to economics systems are certainly flawed. Animal spirits of ‘red in tooth and claw’ competition, beloved of advocates of certain strains of corporatism, are toxic (to use a contemporary word in vogue) for the sciences of human behaviours.

I confess to not quite getting what John Lander (the author of the Darwiniana Blog) is on about in his claims for ‘eonic’ insight into these matters,especially with his apparent assertion that the Bible is ‘a document of interest,’ as police investigators call certain suspects, but I concur with his statement ‘the real evolution of social cooperation seems to have been forgotten’.

The sociability of primates, in particular the Hominine lineage through the evolution of about 18 species before Homo sapiens emerged dominant, is the key to understanding the crucial role that social co-operation – a set of behaviours, not genes – played in the biological evolution of our species over several million years.

I discuss this in my paper on the “Pre-history of Bargaining: an multi-disciplinary treatment, Part I”, which you may download from Lost Legacy’s Home Page (in red, at the top; just click and follow the link).

I am presently working on developing this paper and the research supporting it into a book-length treatment (title to be decided). Adam Smith, you may be assured, plays a major role in my approach, though most of today's epigones and their acolytes may not recognise the Adam Smith from Kirkcaldy. who was quite different from the so-called 'Adam Smith' from US academe.

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Friday, January 30, 2009

Adam Smith is Innocent

Martin Hutchinson, writes on “How Beatniks, Pyromaniacs and Gangsters Caused the Global Financial Crisis" on the Monday Morning Blog (HERE), to which a Richard Williams posts this comment (29 January 2009):

The point you seem to have taken very long to grasp is that deregulation, laissez-faire, free-market economics, etc. have never functioned. Free trade is a British hoax used to plunder its colonies. Adam Smith was recruited by Lord Shelburne to concoct the Wealth of Nations as a means of discrediting the American System, which has always been the adversary of the British System, the one that is now collapsing. Smith argued that individual selfishness and greed leads to the common good. In fact, national governments are the sole guarantors of the general welfare. Perhaps you ought to read Alexander Hamilton.”

Comment
Richard Williams puts modern spin of Alexander Hamilton’s protectionist policy writings for the new Republic, and on the German author, Friedrich List’s nationalist polemical work, The National System of Political Economy (1841). Fair enough. Any student of the period should read these and other works, and should make his or her mind up about the issues related to them.

However, Richard Williams extends his criticism of the period to what Adam Smith is alleged to have written and advised, which clashes with the known facts. Now this is not surprising because Smith’s legacy is subject to widespread distortion from many sources, not the least significant of which is the distortion emanating from modern economists who invented of a wholly mythical Adam Smith, some parts of which Richard Williams draws upon.

As for meetings between Smith and Lord Shelburne on the subject of colonies, in this case of the behaviour of Greek and Roman colonies in classical times (which he found, variously, acted independently, didn’t always contribute to the mother country, and were in states of rebellion).

Smith repeated some of this material in Wealth Of Nations. Far from ‘discrediting the American system’ (whatever that means), he wrote what history reported and what he observed about recent relations with the British colonies.

Smith’s analysis in Wealth Of Nations was not sympathetic to the aims of british legislators, and some of those who influenced them, as British governments moved towards suppression of the rebellion by British colonists. He suggested a compromise of a union of parliaments – full representation in the House of Commons and a contribution to the cost of defending the colonies from French and Spanish military interventions – Spain held territory to the south of the British colonies and the French held territories to the North and West, and both were present in the Caribbean and Central America.

From Britain’s point of view, the Cromwellian Navigation Acts were beneficial to Britain, an island that was dependent on access to and from the sea for its trade. That is a fact of geography and of commerce. Whether it was justified to monopolise trade to and from its colonies was always another matter.

Smith certainly did not think the British mercantile monopoly should continue, as he shows quite clearly in Book IV of Wealth Of Nations, in his polemic against mercantile political economy and its affects on trade with the British colonies in North America and British commercial exploitation through the East India Company and its Royal Charter.

How all this discredited the ‘American system’ in the 1760s is beyond me – it discredited the British mercantile system, not the ‘American’.

He advised Britain that it should have continued to improve agriculture as a generator of wealth (the ‘annual output of the necessaries, conveniences, and amusements of life’) before embarking on too rapid an increase in industry, which he considered was the natural course of development.

Given the new facts about an independent North America, them emerging, he advised the former colonies to continue trading for manufactured goods from the whole of Europe and not just Britain (to break the pernicious British trade monopoly, and utilize competition to reduce import prices and raise export prices), and as the country would grow even richer it should develop the import replacement sectors. This was his honest judgement of how any modern economy should develop naturally. It is cynical in the extreme to see this as a 'conspiracy' or a ‘hoax’.

Smith NEVER ‘argued that individual selfishness and greed leads to the common good’. These were the ‘licentiousness’ views of Bernard Mandeville (1731) , which Smith criticised in Moral Sentiments (1759), though ignorant Hollywood scriptwriters passed it off as Smith’s in the mouth of Geko, and it has been copied since by the uninformed media for readers who know no different.

Whatever the failings of ‘deregulation, laissez-faire, free-market economics, etc.’, these were not Adam Smith’s policies – he never ever used the words ‘laissez-faire’! That is an attribution that gained currency after he had died in 1790, particularly from the early 19th century onwards.

Smith made specific recommendations about the need for regulation (see his chapters in Wealth Of Nations dealing with problems in banking and his recommendations that the Government was the only safe agency for quality controls in stamping cloths and assaying gold and silver plate and bullion).

Smith favoured freer commerce, within the ambit of laws and justice. The numerous interventions of Government in social life, including commerce, were well founded in the 18th century, including the legalisation of town guilds (local trade monopolies), the Settlement Acts preventing the free movement of people around the United Kingdom, and the Apprenticeship Statute which pretended to guarantee quality, but which enabled Masters to ‘widen markets and narrow the competition’.

His recommendation for widespread public funding of education – a ‘little school’ in every parish – was an ambitious expansion of public expenditure, with parents paying something (even a penny) for the education of all children (a nascent voucher scheme?).

Finally, what are we to make of the allegation: “Free trade is a British hoax used to plunder its colonies”?

For a start, whatever British governments did from the 16th century onwards it was surely fortuitous that North America was settled largely by people largely from the British constitutional monarchy (1688) and not the Spanish, Portuguese, or French absolute monarchies.

It is unlikely that Richard Williams (of Anglo-Welsh descent?) would be able to write so despairingly about the running of, and the outcomes from, British colonies in North America. The Spanish and Portuguese colonies have not exactly performed as well, either economically or in terms of Liberty, as the former colonies performed when under British rule and since, when to a large extent, the institutional structures of the new Republic were formed from British theory (if not practice) in jurisprudence, moral philosophy, and civic justice.

Smith himself drew the favourable contrast between the state of affairs in the British colonies in America and the state of affairs in India under the East India Company on the eve of the Rebellion (not that the ‘Indians’ in North America prospered well from the benefits of Liberty any more than the Indians under The Company did any better).

But for ‘Free Trade to be a Hoax’ it would require some serious conspiracy naivety to link this to Adam Smith.

His historical observations in jurisprudence and his writings of a commercial society were largely ignored and were not implemented by British governments. Free trade remained an idea and not an actuality; he didn’t think a fully free trade society was likely ever to occur because of the need for some tariffs to raise revenue for government (there was no income tax in Britain while Smith was alive), and without customs revenue, governments would not function in their essential duties of defence, justice, public works and public institutions that facilitated trade (as the USA soon found out).

His last paragraph in Wealth Of Nations was to recommend that:

Great Britain should free herself from the expence of defending those [colonial] provinces in time of war, and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances’ (WN V.iii.92: p 947; Edwin Canaan, 1937 edition, p 900, Random House).

Unfortunately, but probably inevitably, his advice was disregarded by all British governments, despite the great opportunity that the loss of the British colonies presented them with, enabling them to abandon the goal of Empire, world roles of imagined glory and unilaterally assumed responsibilities, refrain from embarking on fresh continental wars and from keeping old colonies, Canada, Caribbean, and not to embark on adding new colonies (Australia, 1788), Africa, India and Asia, and continuing with an ever deeper mercantile political economy, all refuted by Smith in futile detail in Wealth Of Nations.

‘Free trade’ was never a ‘hoax’ on Smith’s part. His thinking was ignored in practice, though his memory is only lauded in a theory he did not condone. That is measure of the British national tragedy right into the 21st century.

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Thursday, January 29, 2009

A Scientist Rejects Belief in Invisible Hands

Simon A. Levin writes on the Essential Talks (Docs) Blog HERE:

Simon A. Levin is the George M. Moffett Professor of Biology and director of the Center for BioComplexity at Princeton University, where he founded the Princeton Environmental Institute.

"Ecosystems and Socioeconomic Systems as Complex Adaptive Systems"

“Yet while we may believe in the “invisible hand” that according to 18th-century economist Adam Smith steers our markets, we can’t leave the environment up to fate, Levin says: “There is no invisible hand that guides or preserves the biosphere
.”

Comment
Simon should know that Adam Smith said no such thing. His use of the metaphor of an invisible hand was not about how markets work (as outlined in Books I and II of Wealth Of Nations – where the metaphor is never mentioned).

He used the metaphor in Book IV of Wealth Of Nations, not about it ‘steering markets’; in fact, not about markets at all.

His single use of the metaphor was in relation to the consequences of the risk-avoidance of some merchants impelling them to invest their capital locally and not to take the greater risks of sending it abroad to such as the British colonies in North America.

Check it out in Book IV, chapter ii: ‘Of restraints upon the importation from foreign countries of such Goods as can be produced at Home’, pp 452-72.

Smith’s only reference to ‘an invisible hand’ is on page 456, after his full explanation of the merchant’s motivation, ‘he intends only his own security’, add the unintended consequences that as a result domestic output and employment are increased (the whole is the sum of its parts).

So not only are there no invisible hands guiding or preserving ‘the biosphere’; there ain’t one guiding or preserving markets either. That’s a modern myth invented in the 1950s by modern economists and believed now by many more who have not read the entire chapter ii in Book IV of Wealth Of Nations.

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Smith on Equity

Michael’ writes the Urbane Scrumping Blog: HERE:

I consider myself a belated child of the enlightenment and that Adam Smith is just a quantitative utilitarianist. I can never totally accept the utilitarian vision, being tempered by both Rawls and a belief in some values (like equity) that aren't easy to nail in a utilitarianst sense.”

Comment
Why does Michael bring Adam Smith into a criticism of utilitarianism?

He was concerned with the blatant case for equity in mid-18th-century Britain, given the subsistence standards, but little more, and then occasionally when demand rose and employers had no option but to increase wages.

He stated this specifically in Wealth Of Nations:

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? 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: p96; Edwin Canaan, ed. 1937; pp 78-9, Random House).

Smith wrote: ‘It is but equity, besides…’ seems clear to me, as if Smith expects the point he makes to be obvious.

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Wednesday, January 28, 2009

Adam Smith and Nicolo Machiavelli

A student reader asks if I have anything on the connections, if any, between Niccolo Machiavelli and Adam Smith for a paper he is writing.

Unfortunately I do not at present. I compiled some extracts from Wealth Of Nations, Moral Sentiments and Lectures in Rhetoric and Belles Lettres, which may be relevant, or, presumably, he has already found.

For readers' information I post them below:

"Adam Smith: mentions of Machiavelli in Wealth Of Nations and Moral Sentiments and footnote on Lectures on Rhetoric and Belles Lettres

(Compiled by Gavin Kennedy)

Book III, Chapter IV
How the Commerce of the Towns Contributed to the Improvement of the Country

“Sometimes they have been introduced, in the manner above mentioned, by the violent operation, if one may say so, of the stocks of particular merchants and undertakers, who established them in imitation of some foreign manufactures of the same kind. Such manufactures, therefore, are the offspring of foreign commerce, and such seem to have been the ancient manufactures of silks, velvets, and brocades, which flourished in Lucca, during the thirteenth century. They were banished from thence by the tyranny of one of Machiavel's heroes, Castruccio Castracani. In 1310, nine hundred families were driven out of Lucca, of whom thirty-one retired to Venice and offered to introduce there the silk manufacture. Their offer was accepted; many privileges were conferred upon them, and they began the manufacture with three hundred workmen. Such, too, seem to have been the manufactures of fine cloths that anciently flourished in Flanders, and which were introduced into England in the beginning of the reign of Elizabeth; and such are the present silk manufactures of Lyons and Spital-fields. Manufactures introduced in this manner are generally employed upon foreign materials, being imitations of foreign manufactures. When the Venetian manufacture was first established, the materials were all brought from Sicily and the Levant. The more ancient manufacture of Lucca was likewise carried on with foreign materials. The cultivation of mulberry trees and the breeding of silkworms seem not to have been common in the northern parts of Italy before the sixteenth century.” (WN III.iii.19: pp 407-8)

Book III, Chapter IV

How the Commerce of the Towns Contributed to the Improvement of the Country

WN III.iv 24: Page 426:
‘Italy is the only great country of Europe which seems to have been cultivated and improved in every part by means of foreign commerce and manufactures for distant sale. Before the invasion of Charles VIIIth, Italy according to Guicciardin, was cultivated not less in the most mountainous and barren parts of the country than in the plainest and most fertile. The advantageous situation of the country, and the great number of independent states which at that time subsisted in it, probably contributed not a little to this general cultivation. It is not impossible too, notwithstanding this general expression of one of the most judicious and reserved of modern historians, that Italy was not at that time better cultivated than England is at present.’

with footnote reference 55, to Smith’s “Lectures on Rhetoric and Belles Lettres” [1763], ed. Lothian ii. 69-70, p 110: reference to Guicciardini (Venice 1738) Dela Istoria d’Italia, who with Machiavelli are described as the ‘two most famous modern Italian historians’. Machiavelli was especially admired, being ‘of all modern Historians the only one who has contended himself with that which is the chief purpose of History, to relate events and connect them withy causes, without becoming a party of either side’.

ARTICLE III

Of the Expence of the Institutions for the Instruction of People of all Ages

‘In the church of Rome, the industry and zeal of the inferior clergy are kept more alive by the powerful motive of self-interest than perhaps in any established protestant church. The parochial clergy derive, many of them, a very considerable part of their subsistence from the voluntary oblations of the people; a source of revenue which confession gives them many opportunities of improving. The mendicant orders derive their whole subsistence from such oblations. It is with them as with the hussars and light infantry of some armies; no plunder, no pay. The parochial clergy are like those teachers whose reward depends partly upon their salary, and partly upon the fees or honoraries which they get from their pupils, and these must always depend more or less upon their industry and reputation. The mendicant orders are like those teachers whose subsistence depends altogether upon the industry. They are obliged, therefore, to use every art which can animate the devotion of the common people. The establishment of the two great mendicant orders of St. Dominic and St. Francis, it is observed by Machiavel, revived, in the thirteenth and fourteenth centuries, the languishing faith and devotion of the catholic Church. In Roman catholic countries the spirit of devotion is supported altogether by the monks and by the poorer parochial clergy. The great dignitaries of the church, with all the accomplishments of gentlemen and men of the world, and sometimes with those of men of learning, are careful enough to maintain the necessary discipline over their inferiors, but seldom give themselves any trouble about the instruction of the people.” (WN V.i.g.2: pp 790-10 – repeats footnote above)

PART I
Of the Funds or Sources of Revenue which may peculiarly belong to the Sovereign or Commonwealth

“Princes, however, have frequently engaged in many other mercantile projects, and have been willing, like private persons, to mend their fortunes by becoming adventurers in the common branches of trade. They have scarce ever succeeded. The profusion with which the affairs of princes are always managed renders it almost impossible that they should. The agents of a prince regard the wealth of their master as inexhaustible; are careless at what price they buy; are careless at what price they sell; are careless at what expence they transport his goods from one place to another. Those agents frequently live with the profusion of princes, and sometimes too, in spite of that profusion, and by a proper method of making up their accounts, acquire the fortunes of princes. It was thus, as we are told by Machiavel, that the agents of Lorenzo of Medicis, not a prince of mean abilities, carried on his trade. The republic of Florence was several times obliged to pay the debt into which their extravagance had involved him. He found it convenient, accordingly, to give up the business of merchant, the business to which his family had originally owed their fortune, and in the latter part of his life to employ both what remained of that fortune, and the revenue of the state of which he had the disposal, in projects and expences more suitable to his station.” (WN V.ii.a.6: p 819) See footnote 8, quotes from Machiavelli History of Florence Book VIII, trans, London, 1851, pp 400-1

Mention of Machiavelli in Moral Sentiments:

“Mere imprudence, or the mere want of the capacity to take care of one's-self, is, with the generous and humane, the object of compassion; with those of less delicate sentiments, of neglect, or, at worst, of contempt, but never of hatred or indignation. When combined with other vices, however, it aggravates in the highest degree the infamy and disgrace which would otherwise attend them. The artful knave, whose dexterity and address exempt him, though not from strong suspicions, yet from punishment or distinct detection, is too often received in the world with an indulgence which he by no means deserves. The awkward and foolish one, who, for want of this dexterity and address, is convicted and brought to punishment, is the object of universal hatred, contempt, and derision. In countries where great crimes frequently pass unpunished, the most atrocious actions become almost familiar, and cease to impress the people with that horror which is universally felt in countries where an exact administration of justice takes place. The injustice is the same in both countries; but the imprudence is often very different. In the latter, great crimes are evidently great follies. In the former, they are not always considered as such. In Italy, during the greater part of the sixteenth century, assassinations, murders, and even murders under trust, seem to have been almost familiar among the superior ranks of people. Caesar Borgia invited four of the little princes in his neighbourhood, who all possessed little sovereignties, and commanded little armies of their own, to a friendly conference at Senigaglia, where, as soon as they arrived, he put them all to death. This infamous action, though certainly not approved of even in that age of crimes, seems to have contributed very little to the discredit, and not in the least to the ruin of the perpetrator. That ruin happened a few years after from causes altogether disconnected with this crime. Machiavel, not indeed a man of the nicest morality even for his own times, was resident, as minister from the republic of Florence, at the court of Caesar Borgia when this crime was committed. He gives a very particular account of it, and in that pure, elegant, and simple language which distinguishes all his writings. He talks of it very coolly; is pleased with the address with which Caesar Borgia conducted it; has much contempt for the dupery and weakness of the sufferers; but no compassion for their miserable and untimely death, and no sort of indignation at the cruelty and falsehood of their murderer. The violence and injustice of great conquerors are often regarded with foolish wonder and admiration; those of petty thieves, robbers, and murderers, with contempt, hatred, and even horror upon all occasions. The former, though they are a hundred times more mischievous and destructive, yet when successful, they often pass for deeds of the most heroic magnanimity. The latter are always viewed with hatred and aversion, as the follies, as well as the crimes, of the lowest and most worthless of mankind. The injustice of the former is certainly, at least, as great as that of the latter; but the folly and imprudence are not near so great. A wicked and worthless man of parts often goes through the world with much more credit than he deserves. A wicked and worthless fool appears always, of all mortals, the most hateful, as well as the most contemptible. As prudence combined with other virtues, constitutes the noblest; so imprudence combined with other vices, constitutes the vilest of all characters. “ (TMS VI.1. 16: pp 216-7)
Footnote 5: Machiavelli, Descrizione del modo tenuto dal duca Valentino nello ammazzare Vitelazzo Vitelli, Oliverotto da Fermo, il signor Pagol e il duca di Gravina Orsini."

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Tuesday, January 27, 2009

A Distorted Version of History

John Kozy writes on Global Research.ca, Blog, 26 January (HERE):

‘Capitalism Snuffs out the Age of Enlightenment's Candle’

“Mercantilism initially became the dominant economic theory and its implementation was carried out by imperial conquest and exploitation, and Adam Smith's classical economics was introduced merely as a more efficient way of expanding national wealth. The successful adoption of classical economists can be attributed to him and John Locke and those self-seeking aristocrats who recognized the license to steal that it provided.

Both Locke and Smith lived in a class-structured monarchial England. Although they themselves were not aristocrats, they certainly were not commoners. Both had aristocratic benefactors. The first Earl of Shaftsbury, who became Lord Chancellor, became Locke's benefactor, and Locke became the secretary of a very powerful board. Adam Smith's patron was Lord Kames. Smith obtained a lucrative post as tutor to the young duke of Buccleuch. So although neither Locke nor Smith was an aristocrat, their close associates were and both benefited from and shared in the privileges of the aristocracy. Sociologists claim that people who have a similar location within a system of property relations develop other important similarities of thought, values, style, behavior, and politics. Since both Locke's and Smith's principal associations were with members of the aristocracy, they both acquired and attempted to preserve and perhaps further establishment values.

Although Locke has gained some standing as a philosopher while Smith has not (even though he was a professor of moral philosophy), Locke made a fundamental categorical mistake in his Second Treatise on Government which Thomas Jefferson was quick to notice. Locke named life, liberty, and property as natural rights. Even in Locke's England, society could at least try to protect the lives and liberty of even common people, but it could not attempt to protect their property since they had none. So Jefferson altered this list of natural rights to life, liberty, and the pursuit of happiness. Since, in most respects, only the English aristocracy held property, its protection became a protection of the status quo. And protection of establishment property even today is the fundamental reason for the distinction between those economic activities that are legitimate and those that aren't. That alone accounts for the difference between selling a consumer a product that is a dud, and a consumer's buying a product with a check that is a dud. The haves get to keep what they have while the have-nots get fleeced.

Smith, too, is an establishment philosopher. As Richard Reeb has pointed out in "An Historian on British History" (http://adamsmithslostlegacy.com/2008/12/historian-on-british-history.html)

"There were essentially two approaches that kings of the early modern nation states took toward the generation of national wealth. One supported acquisition of precious metals and hoarding them for national purposes ... Another view, favored in Britain, was that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation. Adam Smith’s Wealth of Nations provided the most powerful argument for the second view of national wealth. The British government was no less tempted to commandeer the resources of the country than the Spanish, but Smith made a compelling case for laissez-faire (let them do as they please) as far more productive than national missions to exploit natural resources the world over to enrich the government’s coffers. Smith’s famous "invisible hand" was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be." Smith's goal was not only to preserve the establishment but to make its economic avarice and exploitation more efficient. In effect, the adoption of classical/neo-classical economics not only succeeded, it extinguished the goals of the Age of Enlightenment and put an end to humanity's progress toward liberté, égalité, fraternité and what Lincoln so aptly expressed when he spoke of "a new birth of freedom" and a "government of the people, by the people, for the people." Not a single such government exists today, and our nation states, although slightly altered in form, mimic the monarchial states of seventeenth century Europe in which common people not only exist for the sake of the state and its institutions but are thought of as expendable.

Some economists may claim that this is mere happenstance, not a necessary result of the economic system, but that claim is vacuous. Under classical economics, individuals supposedly act in their own self-interest as economic agents who dedicate themselves to those economic activities that bring the greatest income. But if this were so, society would be impossible. No one would be willing to do the low-paying jobs that the existence of society requires. Who would be a minimum-wage sewer worker? Who would be a public school teacher? Who would be a nurse? Who would be an artist, a serious (as opposed to a popular) composer, a social worker, an ambulance driver, a fireman, a policeman, a janitor, a door man, a porter, an factory worker, an oil rig worker, a lumberjack, a garbage collector, a checkout clerk at a grocery store, a college professor in a public institution, or even a cleric? People would do most of these jobs only out of necessity, which means that the system impales its adherents on the horns of a dilemma. Either Classical economics is founded on the completely false postulate of economic self-interest or it must be designed so that the largest numbers of people in a society are never allowed to pursue their own self-interests as economic agents. (Anyone who believes that adopting a theory that impales its adherents on the horns of a dilemma is rational is delusional.) One economic aspect of this design is Smith's subsistence theory of wages. (Only a person with a low opinion of common humanity could even have proposed such a thing.)

John Locke, Adam Smith, and Classical economists snuffed out the Age of Enlightenment's candle! They brought human progress to a dead stop.



“Mercantilism initially became the dominant economic theory and its implementation was carried out by imperial conquest and exploitation, and Adam Smith's classical economics was introduced merely as a more efficient way of expanding national wealth.”

Comment
John Kozy sees the world through cracked glasses if he can write and believe that “Adam Smith's classical economics was introduced merely as a more efficient way of expanding national wealth”. By what social mechanism are such convenient arrangements between a system of government and an individual moral philosopher is ‘fixed’ politically?

Adam Smith independently observed, including reading widely and visiting people from all ranks of British 18th-century society, and wrote about what he observed without fear or favour to anyone. He was not a salaried hack, as implied by John Kozy.

“Both Locke and Smith lived in a class-structured monarchial England.”

Comments
From Canada it may look like that – at least for those lazy enough not to check their sources – but Smith lived all his life in monarchical Britain, and arguably, so did Locke since the crowns of England and Scotland were unified in 1604 and for just over 100 years there was a union of crowns consisting of Scotland and England. Since 1707 there was a union of parliaments creating both a united kingdom and a united parliamentary government within a constitutional monarchy.

It is a fair bet that John Kozy’s ancestors in the 18th century also lived in a ‘class-structured monarchical’ country (and he still does living in Canada), which does not in any way compromise his intellectual independence, any more than it compromised Locke’s (who suffered exile 1682-1688).

Smith’s intellectual independence is a fact too. His closest associates (example, Dugald Stewart) were investigated in 1793 by the legal authorities who were suspicious of Smith’s alleged sympathies with political dissenters against the government – the French Terror caused widespread fear and loathing of anything likely to promote unrest among the British labouring classes – the Wealth Of Nations was a likely prime exhibit for a proposed prosecution of his followers.

It’s interesting what a bit of context does for an empty narrative.

Adam Smith's patron was Lord Kames. Smith obtained a lucrative post as tutor to the young duke of Buccleuch. So although neither Locke nor Smith was an aristocrat, their close associates were and both benefited from and shared in the privileges of the aristocracy.”

Comment
‘Lord’ Kames was not an aristocrat. He was Henry Home, a jurist, who on his appointment to the bench took the honorary title of ‘Lord’, as is still the custom. He was also an accomplished man of letters (Historical Law Tracts, 1758; Essays on Morality and Natural religion, 1751; Sketches of the History of Man, 1774), which apparently counts for nothing with John Kozy. Benjamin Franklin also met Lord Kames – perhaps he was ‘guilty’ of whatever too?

Smith’s appointment as a tutor to ‘the young duke of Buccleuch’ was arranged by the duke’s stepfather, Charles Townshend, the then Chancellor of the Exchequer (of the Boston ‘tea tax’ fame) who had read Smith’s Moral Sentiments and was impressed.

But in what manner Smith ‘benefited from and shared in the privileges of the aristocracy’ is not said. Smith never had a vote under the then franchise; he lived frugally (no carriage-and-four for him), and he was scornful of ‘trinkets, baubles, and contrivances’. His only ‘treasure’ was his library.

“Since both Locke's and Smith's principal associations were with members of the aristocracy, they both acquired and attempted to preserve and perhaps further establishment values.’

Comment
Guilt by association is unbecoming of discourse, more suited to tabloids and cynics (and well practised by totalitarian states). If John Kozy has read Smith’s Moral Sentiments (1759) he would know that Smith found ‘establishment values’ somewhat lacking when set against the standards set by moral philosophy. He was also deeply sceptical of the manner in which sovereigns, legislators and those who influenced them behaved.

There are enough quotations available in his books for ‘witch-hunter’ inquisitors to make a case that Smith, for the paranoid, was a dangerous radical. I suggest the John takes a look. True, Smith observed that the ‘distinction of ranks’ was important for social stability, as was justice and the rule of law. He had enough knowledge of what happened in history, recent and ancient, when instability reigned, the lower ranks came off worse, and the upper ranks were replaced by people who behaved the same, and often worse.

In effect, the adoption of classical/neo-classical economics not only succeeded, it extinguished the goals of the Age of Enlightenment…”

Comment
Neo-classical economics is modern and is not related to Adam Smith or anybody writing within 70 years of his death in 1790. By then the Age of Enlightenment had passed with the deaths of those who made it possible (despite, of course, their insidious associations within British society, a paradox left unexplained amidst John Kozy’s bile).

Even Adam Smith’s Wealth Of Nations was cast aside, except for occasional genuflection in vague remembrance, though hardly ever read, as the British and North American economies carried on versions of mercantile political economy, colonialism, protectionism, jealousies of trade, wars for trivial ends, monopolies, and such like.

In its place, a spurious ‘laissez-faire’, falsely attributed to Adam Smith, was practised, allegedly, and a false ‘small government’, also attributed to Adam Smith, became the watchword on the 19th century, as military expenditures continued to climb and ‘non-intervention’ was practised brutally for those merciless in face of pestilence, famine, the factory system, and ignorance.

One economic aspect of this design is Smith's subsistence theory of wages. (Only a person with a low opinion of common humanity could even have proposed such a thing.)”

This is so absurd as to be risible. Adam Smith did not propose any such thing. He observed what was going on; he did not propose such a policy (except if wages were below subsistence). The subsistence wage was the fact of the time, imposed by those employers who saw low wages as a means of disciplining labourers to work long hours to make ends meet. Smith identifies the proponents of such ideas and argues against them.

He railed against the combinations of the masters, ‘conducted with the utmost silence and secrecy’, and described the combination of workmen as ‘defensive’. (Wealth Of Nations, I.viii.13: p 84)

He also added:

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? 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)

May I respectfully suggest that John Kozy read Chapter 8, Book I of Wealth Of Nations before he asserts notions that tend to undermine this reader’s faith that he knows of what he talks about.

He refers above to a post in Lost Legacy (from which I am grateful). I suggest he reads more of our posts, and at least get his account of Adam Smith and his role as a man of letters straight.

"John Locke, Adam Smith, and Classical economists snuffed out the Age of Enlightenment's candle! They brought human progress to a dead stop."

Comment
Excuse my astonishment at this absurd sentence.

Who were the leading lights in the Enlightenment in Britain?

Why, the very same Adam Smith, Lord Kames, Joseph Black, James Hutton, John Simmons, Dr Reid, William Robertson, Adam Ferguson, Colin Maclaurin, James Millar, and such like, and all of them known to, or who mixed with, Adam Smith in the Royal Society of Edinburgh and the Royal Society of London - Smith was a fellow of both - and many of them attended his famous Sunday dinners at Panmure House, Edinburgh for intellectual conversations.

If John Kozy really believed that Adam Smith (and John Locke, though wrong period) "snuffed out the Age of Enlightenment's candle" he is either on the brink of a sensational career of Nobel-Prize potential ahead of him if he can prove it, or he is worthy only of sad commiseration.

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Sunday, January 25, 2009

Wha's Like Us?

David Lindsay (‘Pro-Life, Pro-Family, Pro-Worker, Anti-War') HERE(25 January):

‘A Hardy Son of Rustic Toil’

One is that he and Scotland do not quite fit. Or, rather, did not. His sheer genius turned a culture bipolar between Calvinism and Enlightenment rationalism into one conducted within a triangle with the Westminster Confession and its staunchest upholders in one corner, the likes of Adam Smith and David Hume in another, Robert Burns (and also, later, Sir Walter Scott) in the third, and most people somewhere in the middle.

And another is that his writing in Scots identified him in his time as falling within a category mostly comprised of Episcopalians and such Catholics as there were in the eighteenth-century Lowlands. He maintained good relations with both, even if it is true that he had little or nothing in common with either beyond a hostility both to rationalism and to Calvinism (or at least, in the Episcopalian case, to the Westminster variety of it). And those hostilities not only formed his own rural proto-Romanticism, but then went on to inform, not least through him, the Mediaeval and Jacobite nostalgia of the Episcopalian Scott.

Indeed, Burns entered Continental intellectual life via the Scots Catholic seminaries in exile. Such seminaries serving these islands have a great deal to answer for. Among very much else, they also introduced football to the Iberian Peninsula.”


Comment
David Lindsay writes of Robert Burns, of course, which readers unacquainted with Scottish history may not realise until his name is mentioned, and if even they realise of whom David speaks, many would be perplexed by the depth of his historical associations into which he places Burns’ life in mid-18th century Scotland.

What a tangled web of bloody strains and passions Scotland was in those days!

It echoes still of these in the present, the most violently destructive, or at least most threatening, of them now subdued; the population is larger, the certainties of the old loyalties are more ephemeral; the old battles are almost forgotten or, at best, dimly remembered; and the venerable firebrand warriors of the creeds, passions, and hatreds, are no more.

Scotland has moved beyond them, nostalgia for its past and people, at its most potent on one or perhaps two days a year, but even then it never rise beyond a few limp gestures of empty defiance, despite, or because of, the drink and the almost pathetic nursing of national sentimentality posing as solidarity.

Of Adam Smith and David Hume, they were of a mind that saw reason as the slave of the passions, and Smith, we know, signed the Calvinist Confession of Faith in 1751 to conclude his election as a professorial member of Glasgow University (the Cathedral located conveniently next door).

We also know he chose not to be ordained at Oxford into the Church of England and serve his times as an Episcopalian Church Minister in Scotland. We also know he was not a Jacobite, though he was a friend of several, and that he had stiff things to say about the Roman Catholic Church and 'papist' priests and their ‘superstitions’.

Smith also “entered Continental intellectual life” but not through any roots of it in Scotland, except from its books of which he read aplenty in French, Italian, and the ancient Greek and Latin; however, he met, mixed with, and was stimulated intellectually by, those intellectuals who frequented the Salons of Paris, in particular the Physiocrats and their daring économistes, not forgetting Voltaire in Geneva.

David Lindsay writes an evocative piece, probably of most marked relevance to those who know their Scottish history, and Lost Legacy congratulates him for it. Link and read it today on Burns' Birthday.

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Saturday, January 24, 2009

Smith's Theory of Value

Isaac Moorehouse writes in The Prometheus Institute Blog an interesting article on Adam Smith’s theory of value HERE (23 January):

Was Adam Smith wrong?’

”Indeed, Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later. I consider Smith a great thinker, and a hero of liberty. That doesn’t mean he was never wrong; particularly when it comes to the question of value.

Smith’s thoughts on the derivation of value in his Wealth of Nations laid the groundwork in this area for later thinkers like David Ricardo (another brilliant mind who was right about many other things) and eventually Karl Marx.

Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.” (The Wealth of Nations, Book I, Chapter VII)

Smith elaborated further by describing other costs of producing a good, including the role of the entrepreneur and capitalist and the profits they require.

The problem with Smith’s analysis is not that the cost of production has no link to the value or money price of a good – indeed, the two are closely connected. He merely had the relationship backwards.

In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange.

However, Smith was correct in seeing a relationship between the cost of production and price: Once a producer or entrepreneur has an indicator of what someone was willing to pay for a good, he can speculate how much others will be willing to pay in the future. He may be incorrect, but he will start with an estimate based on past experience and hope to get an equal or higher price. It is the estimated price (which reflects the value others place on the good) that will dictate how much he can spend on production.

Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.

That Smith saw the factors which go into the production of a good as the cause of the price, rather than the effect, may seem like a small error. But economics, like all attempts to study the behavior of human beings, is a subtle science which requires great attention to the correct logical progression of actions. A misunderstanding between cause and effect can be fatal.


Comments
“Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later.”

Comment 1:
his timeless prose on the invisible hand and the self-interest of the butcher” is problematic. He used this particular metaphor once and it becomes ‘timeless prose’.

Compare his use of another metaphor: ‘The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour’ ( WN II.ii.86: p 321).

This metaphor is surely more important than the invisible hand, yet it is not regarded as a ‘theory’, or a ‘concept’. Nor is it, surprising, regarded to offer a great explanation.

Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer
.” (WN I.vi.1: p 65)

Comment 2: This is the first of several misunderstandings of Smith on value, which is shared with many economists and many more casual readers.

Smith discusses society before the ‘accumulation of stock and the appropriation of land’, that is in primitive society when the only factor of production (using modern terminology) is the labour of the hunter. There are no owners of capital stock and no owners of land. How is the exchange value to be determined in these circumstances. The two hunters have only the products of their hunting endeavours available for exchange.

The exchange value of each item, Smith argues, can only be determined by how much of one item is exchanged for the other. It is the ratio of beaver/deer or what amounts to the same, the deer/beaver exchange ratio that is to ‘higgled and bargained’ by the two hunters. Nobody else is involved, because nobody else has any claim on the property of the two hunters.

Smith asserts that the only variable relating one good to the other is the time (effort) required to acquire the kill.

Because both hunters are in the same position, turning to each hunter’s subjective value, either as ‘buyer’ or a ‘seller’ (actually which is which?), is not a solution – that is a recipe for a long haggle! On its merits, whatever exchange ratio they settle upon, their ‘toil and trouble’ (a phrase Smith uses elsewhere for a different purpose) is likely to be an important consideration.

In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange
.”

Comment 3
In bargaining transactions neither the buyer nor the seller unilaterally determines the outcome of the eventual bargain, but Isaac Moorehouse tends to present his critique of Smith from the buyer’s point of view. He has also introduced money into the transaction, which represents an entirely different mode of subsistence from that of crude transactions between hunters before other owners came into Smith’s account of exchange value.

In ‘early and rude society’, labour certainly was the unambiguous property of the labourer. He shared it with nobody else. Natural Law theory, incidentally, also dictated this to be the case (though such a theory carried no weight in such times). Ian states that “each individual values each good differently” – absolutely correct and that very essence of the bargained transaction never changed before and after the invention of money.

But I think Ian has made the same conclusion that most readers come to in the rather confusing switch back and forth among ‘early and rude society’ and those modes of subsistence, which came later in historical time, where other property owners were present.

In short, too much is made of the labour theory of value (LTV) implied in Smith’s example of the hunters. And, again briefly, there is some confusion with Smith’s use of the phrase, ‘toil and trouble’ as a psychological de-motivator, with its possible (though unintended) meaning as a sort of ‘embodied’ component of the so-called inherent value of an owned product of other property owners, landlords, labourers and stock holders.

No product, beyond ‘rude’ society has inherent value; there is only exchange value – what each party is prepared to give to get whatever else in transacted with the other. It is only in ‘rude’ society that their labour is the value of a product in exchange as far as the parties to the transaction are concerned. It is what each argues for that counts towards their subjective perception of what their own product is worth in exchange for the other’s product.

Societies moved on to the existence of property owned by others. The landlord owned the forest and all that was in it, and charged what we call rent for her permission to hunters or farmers to enter her land. The stock owner (provider of subsistence and tools) charged labourers (deducted from wages) for whatever they needed to complete their work that replaced the capital stock he had laid out, plus his profit, otherwise there was no point advancing his stock to one labourer merely to have that amount returned and nothing more – when he preferred to advance his stock to other labourers to have it returned plus a profit.

In the transactions to sell the products of the owners of the factors, land, labour, and stock, sellers are mindful of the costs that must be met for successive transactions (if they lose out in money terms, they withdraw from future transactions) and the buyers, unconcerned, because unaware, with the sellers’ costs are focussed on acquiring products that they value more than what they give up to acquire them. The ratio of what is given up to what is acquired is the exchange value of the product. Careful reading of the relevant chapters (not strings of quotations, often out of context) shows that this is Smith’s theory of exchange value and not some crude version of LTV.

Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.”

Comment 4
In societies beyond ‘rude’ subsistence, Smith did not have a cost of production theory. He offered the psychological motivation of people preferring and thereby labouring to acquire the means of buying – money from rent, wages or profits – what they required or fancied because from such transactions they avoided the ‘toil and trouble’ of making them for themselves, contrasted with the hunter in the forest who laboured for his families food, for their animal-skin clothing, and for their wooden shelters. He didn’t have enough time in a day to do more than that which satisfied his and his families immediate needs.

The social evolution of ‘truck, barter, and exchange’ where it was established as a behavioural habit began to widen the availability of goods that saved them the ‘toil and trouble’ and simultaneously raised their subsistence quality.

The avoidance of the toil and trouble of making all the things they wanted was the true worth to them of other people’s products, and, crucially, what became available to them in ‘higher’ modes of subsistence which became by many quanta far more numerous than ever was available in the forest.

Brad Delong calculated that the differences between the ‘toil and trouble’ facing the Yanomamo tribe of stone-age hunters, who live beside the Orinoco River in South America, compared to the modern-age tribes of New Yorkers, who live along the Hudson River in North America, was worth in modern money about $90 for the Yanomamo hunters and about $36,000 for New Yorkers. In modern retailer’s Stock Keeping Units the Yanomamo hunters access several hundred SKUs; New Yorkers access tens of billions of SKUs (quoted in my Adam Smith: a moral philosopher and his political economy, pp105-6, Palgrave Macmillan, 2008).

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The Language of Marxism

‘Roger Gatham’ writes Limited, Inc. HERE:

“Marx and the devil 2”

“What Adam Smith, in the true eighteenth-century manner, puts in the prehistoric period, the period preceding history, is rather a product of history.”


Comment
A classic example of Marxist mystical prose that means different things depending on how how you read it. Capital is full of them – see Surplus Value, Labour Theory of Value – and it creates the semi-religious feel throughout his writings. Cod intellectualism at its worst; discussed endlessly by graduate thesis writers – to be fair, Roger Gatham comments on the phenomenon in his piece - impressing others with the evidence that they understand Marx's thinking and the listeners stare in bewilderment, and if impressionable, with adoration.

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January's Lost Legacy Prize

Neuromesh Blog HERE:

The fact is, most people can’t be trusted to simply take a fair share of the resources available. Adam Smith’s ‘invisible hand’ is a fallacy, the idea that a free economy where people act in their own interest will be led by an invisible hand that guides them towards the good of the whole. Economic theory has been led by this (or at least, hidden behind it while pretending to believe it) for a hundred years, but constantly we’re reminded that humans acting in their own self interest will do it unsustainably.”

Comment
‘The fact’ is that Adam Smith never made the claims for his single use of the metaphor of ‘an invisible hand’ in Wealth Of Nations that have been asserted on his behalf by the economics discipline, including Nobel Prize winners, particularly since the 1950s with the triumph of the mathematical proof of general equilibrium theory, and by propagandists for the capitalist alternative to Soviet communism throughout the Cold War.

Incidentally, capitalism was so superior in economic welfare for the mass of the population, even with a not too good record, that the calamities occasioned by central planning never was never likely to catch up to be near as good, that it is ironic that economists became lyrical about a mystical disembodied hand that was, and remains, redundant in explaining how markets work (and communist planning doesn’t) and was unnecessary to be required such a role.

For Adam Smith the invisible hand was a mere metaphor for the consequencs of risk avoidance.

So Neuromesh is right.

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The Goods and Bads of 'Do Something' Government Interventions

David Glen Cross writes in The Daily Banter Blog HERE: an angry piece that races along, dripping its anger in every sentence. Here is an indicative taste:

Economics the Hard Way”

“Adam Smith and his “Wealth of Nations,” written in the leading colonial power over two centuries ago, wrote of ethics and the higher aspirations of man while England ruled one third of the world as a hereditary empire. Smith’s rights of man could be condensed down to the rights of wealthy Englishmen.”

“But to name any economist is to have another thrown in your face, like Keynes, Friedman, or even the ridiculous Ludwig von Mises, who espoused individualism over the wellbeing of city, state or national interests. Individualism uber alles, or I got mine so screw you. Defying centuries of human evolution and returning to the days of whichever monkey got to the bananas first, he believed that was the only monkey who deserved to eat. These economists go out of their way to deal in the theoretical and never ever postulate negative consequences to their own theories. Of course they believe that their theories have no negative consequences; they speak instead of economic dislocation or short-term economic distress.

It is ironic that in ancient times rulers dealt in absolutes and not in the theoretical. Pharaoh stored grain against famine because it was his duty to do so. Caesar passed out bread and coin to the poor because famine brought riots and riots brought fire, fire that would exceed ten times the cost of the bread and coin.

Today, economists would calculate the least amount of bread and coin necessary against the cost of fire and ruin. But all economic theories are true and all are false. While there is plenty, they are true; when there is not, they are all false.
Any system that fails to supply the most wealth into the most hands is a failed system. History proves it again and again and that is a fact and not a theory. So as I dabble in human economics, I count not the empty houses but the people made empty by these theories. Theories that fail by leaving out the most important component in economics, the wellbeing of the people. This singular failure is the root cause of most of the world’s misery, of war, rebellion and revolution.

It has fed the guillotine, the gallows, and the pike on Tower Hill. That’s learning economics the hard way.”


Comment
It’s beneficial to be brought down to earth occasionally by the voice of the angry past.

Consider, however, that sentence in the penultimate paragraph I quoted above:

“Any system that fails to supply the most wealth into the most hands is a failed system.”

On that basis, every system known to mankind that has ever existed, failed, sometimes severely, often outrageously, and on a few occasions in a few spaces on Earth, marginally. Among the marginal failures we have the relatively opulent areas of the world in the last two centuries during what is known as ‘capitalism’ in its various forms.

I define ‘marginal failures’ as almost reaching general opulence but from continuing long-standing distortions remaining in society, both in the economy and the body politic, while absolute poverty has been eliminated as much as is practically possible, the distribution of relative poverty still leaves those at the very bottom alienated and in despair (anger is a sign of post-recovery of moral strength), as much from tragic events, addictions of various kinds from social, personality, and mental problems, random incidents of the lottery of mindless violence and unsought for tragedy, and the many failings of personal responsibility that may be are impossible to eradicate in any society of humans.

Taking the first paragraph: “Smith’s rights of man could be condensed down to the rights of wealthy Englishmen”, I accept it as a point of view, presumably by a US citizen, but it is, in my humble view, more than a little unfair to Adam Smith, who, incidentally, being Scottish, would hardly be overly concerned with “to the rights of wealthy Englishmen”.

Smith’s Wealth Of Nations is studded with examples of his concern with the rights of the poor majority of British society, most of whom were badly treated labourers, tenant farmers and landless farmhands, with corresponding poverty-level, subsistence only, incomes.

Smith’s mocking contempt for the rich and powerful is only restrained by the necessary proprieties of public discourse in mid-18th-century Britain. It may be taken for granted by David Glen Cross that under US law he is free to write and speak as he pleases to a degree that was not enjoyed by Adam Smith and fellow professors.

That is one of the benefits of liberty, still almost unique in the entire world 232 years later. And bad as life was for David’s parents and grandparents, and during his own childhood years, those of us who taken more dispassionate view of the whole world, have to note, out of respect for hundreds of millions who do not live in North America or Europe and a few other places, the sort of rotten lives lived by the poor in the 1930s US depression illustrated eloquently by David, have been and still are the permanent lot of all of them (except the kleptocratic, hopefully jail-bound, refuse who form their governments and administer their crummy tyrannies).

I include the paragraphs about David’s opinions on Ludwig von Mises, Pharaoh, Caesar, (the last mentione killed a million ‘French’ Gauls in his invasion and sold another million into slavery), and he, or more accurately his successors, financed the bread and circuses for the plebian mobs in Rome from selling millions into slavery, on which basis I would probably choose some other examples as ‘do something’ governments).

But I enjoyed reading David Glen Cross’s punchy and trenchant post, and suggest you do so too (while retaining some modicum of perspective).

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Friday, January 23, 2009

Perpetrators of Myths Mislead Generations of Students, Some of Whom Grow Up to (mis)Advise Legislators

Craig Emerson, a federal Minister for Small Business, Independent Contractors and the Service Economy, reveals the source of those spreading the myth of the invisible hand in The Australian, HERE:

Education essential to reform’

‘The Hawke government was acutely conscious of the imperative of good economic policy in delivering socially progressive policies. Whether all members of the Hawke and Keating cabinets recognised it, the intellectual basis for public policymaking by these Labor governments had its genesis in Adam Smith's work on the benefits of open, competitive markets guided by an "invisible hand".

Though Smith advocated interventions such as state-owned public schools for children of the poor, anti-monopoly legislation and progressive taxation, he is often misrepresented as a champion of business against the interests of working people.
In truth, he was a champion of the people, especially the underprivileged. The deregulatory, pro-competitive policies of the Hawke and Keating governments laid the foundations for an unbroken period of unsurpassed prosperity, starting in 1991.

Not many Hawke and Keating cabinet ministers would have waded through Smith's Wealth of Nations or his Theory of Moral Sentiments, but Smith's intellectual legacy was carried forward and expanded in public policy formulation during the Hawke-Keating era by leading economic thinkers such as Ross Garnaut (Bob Hawke's office), Barry Hughes (Paul Keating's office), senior economists in the Prime Minister's Department, Treasury and Finance, and the Productivity Commission.

The invisible hand cited by Smith can be detected in the deregulation policies of the Rudd Government. But beyond the worthy ambition of fashioning the Australian market into a seamless national economy by getting rid of unnecessary, overlapping federal and state regulation, how much more pro-competitive policy work remains to be done?


Comment
Sadly for Craig Emerson’s assertions, ‘the intellectual basis for public policymaking by these Labor governments [DID NOT HAVE] its genesis in Adam Smith's work on the benefits of open, competitive markets guided by an "invisible hand", because Adam Smith did not have any theory of an invisible hand.

It was used once in Wealth Of Nations, as a simple metaphor for what he took several pages to explain how risk aversion impelled some merchants to refrain from the risks of overseas trade (with the British colonies in North America), which in consequence motivated them to invest their capital locally in Britain and, thereby, to increase domestic capital investment (the whole is the sum of the parts, etc.,) and this meant British domestic output and employment was larger than it would have been if these particular merchants were not so risk-averse.

Those other British merchants who did conduct trade with and investments in the British colonies and elsewhere abroad, somehow did so despite a supposed invisible hand tryin to lead them elsewhere - they sought the higher profits available from their choice, under the protection of Cromwell's Navigation Acts and the presence of the Royal Navy (courtesy of British taxpayers).

The notion that Smith had a ‘theory’ of ‘an invisible hand’ leading all players in markets to act in pursuit of their self-interests and raise annual output and annual employment is a myth, invented (‘made up’ would not be too strong a charge) by advocates of pro-corporate capitalism, then becoming rampant in the USA in the 1950s.

Adam Smith’s works did not require invisible body parts to illustrate how competitive markets worked.

I agree that “Not many Hawke and Keating cabinet ministers would have waded through Smith's Wealth of Nations or his Theory of Moral Sentiments” – they had to take the authoritative assurances of “leading economic thinkers such as Ross Garnaut (Bob Hawke's office), Barry Hughes (Paul Keating's office), senior economists in the Prime Minister's Department, Treasury and Finance, and the Productivity Commission” that the myth was true.

There is a high chance that these doyens of the Australian economic profession had not read Smith’s books either (they probably took it that Wealth Of Nations said something quite different to what they believed having taken it on trust from their tutors - students tend only to read what is examinable!).

Adam Smith was certainly not “a champion of business against the interests of working people” and Craig is absolutely right to make this clear.

Smith’s intellectual arguments, and personal warmth for the growth of commercial society, were driven by the conviction that growth across agriculture, industry and specific, targeted public expenditure, such as defence, justice, and public works and public institutions, would assist the spread of opulence, especially to the labouring poor and their families, albeit slowly and gradually, but steadily too, if legislators and those who influenced them were careful not to approve monopoly schemes to narrow markets and restrict competition, not to indulge in spasms of ‘jealousy of trade’, protectionism, forming loss-making colonies and conducting wars for trivial ends (i.e., not for defensive purposes only).

Introducing, a mystical or miraculous force at work in markets detracts from the real and detailed policy measures that may required from time to time to ensure steady growth, competition, and liberty for all, and not just for the amoral ends of privileged monopolists and their cronies.

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An Economist Confines Adam Smith to the Bathroom

Stray Silvers writes the Stray Silver’s Blog (‘updated Tuesdays and Thursday’) 22 January, from Victoria, British Columbia, Canada HERE:

The economics of a simpler time - a reading list for reformers”

“Some of you may wonder why Adam Smith didn't make the cut
.”

[GK: he chose works by Malthus, Ricardo, and Mill]

I quite enjoyed the Wealth of Nations - enough to re-read it several times. However, despite having some wonderful passages, as a complete text, it's mostly of historical interest. The book is too wordy for its own good, and extremely repetitive. The topics Smith covers are better dealt with in Mill and Malthus, who also correct a few of the pioneer's most obvious errors. Smith had a few specific axes to grind with respect to events that were important at the time and are now obscure, leading to very long stretches of boredom for the modern reader.

The Everyman edition of the Wealth of Nations, which I own, includes notes on the side of each paragraph summarizing its content. If you buy such a print edition, then Smith makes fantastic bathroom reading... flipping the book open to a random page and reading a paragraph or two at a time is a joy. Reading it through, though, as a cohesive work? Not so much
.”

Comment
Chacun à sans goût.

However, Wealth Of Nations is not a textbook on economics; it is a critique, by an articulate and well-read moral philosopher, of mercantile political economy as operated by governments from the 15th century towards a fragile commercial society, as it was and as it was recovering in the 18th century, from the destruction of commerce following the Fall of Rome in the 5th century.

It was not a book of principles of political economy and should not be read as such. When it is read as a ‘principles’ text, the reader is likely to be misled overall, and the modern economist (impatient know-alls as they are educated to become) will retire as disillusioned as they are disoriented, which seems to be the case with Stray Silvers (truly, I mean this in the most respectful of ways).

Mercantile political economy was ‘full’ of policy errors which in Adam Smith’s view distorted the production of wealth – the annual output of ‘the necessaries, conveniences, and amusements of life’ – with detrimental effects on the potential spread of opulence to the majority of the British population in mid-18th century.

Stray Silvers correctly notes that these matters are ‘mostly of historical interest’, but I differ from his assessment of their value today, respectfully, by asking to what end would we study history as economists?

In my humble opinion, given that many of the policy questions that affect today’s society arise from similar mercantile policies examined by Adam Smith and are worthy of study for their modern relevance:

‘jealousy of trade’, hostility to potential trading partners; tariff protections, despite fifty years of GATT, WTO, and regional customs unions and ‘free trade’ areas;
corporate business monopoly-type behaviours based on sheer scale and intimacy with Big Governments;

restrictions on competition (public monopolies turned into private monopolies);
Big Governments on a scale not envisaged in Smith’s day but with the same outcomes when legislatures are influenced by special interest groups, well-funded by their beneficiaries;

calamitous social and economic policies (echoes of the Elizabethan policies of Statute of Apprentices, Settlement Acts; Guild monopolies);

mass regulations that often don’t work, and the absence of regulation where it is needed;

wars and preparation for wars, beyond the needs of legitimate defence;
‘failed states’ with kleptocracy in place of civil governments, based on liberty and justice in many parts of the world;

and a near total failure to spread opulence by wealth creation, rather than so-called ‘poverty relief’, despite a century of increasing opulence from economic growth when the world has an unprecedented and impressive record of technological progress.

These not just ‘a few specific axes [for Adam Smith] to grind’, nor were they solely ‘with respect to events that were important at the time and are now obscure’.

Many of these same policies are still with us and seem likely to remain so, despite Nobel Prizes being awarded to modern economists for their versions of their contribution to the ‘progress’ of our discipline, though much of their work, replicated in faculties across the world, are about imaginary economies that do not exist and which are absent of human beings, who resist representation by mathematical variables.

I suppose, however, it is a step in the appropriate direction that Stray Silver recommends people should read Malthus, Ricardo, and Mill. But I am not happy that Smith is left to the confines of the bathroom.

Reading snippets of Smith is what has got us into this mess in the discipline; too much to say about an imaginary world that doesn’t exist (and which legislators and those who influence them do not understand), and too much to say about what Smith never advised (laissez-faire, night watchman states’, ‘leave everything to an invisible hand’, corporate entities are best left alone – even when ‘bad’ they miraculously turn out to be the ‘best’ for society; ‘greed is good’ and selfishness is a virtue).

And that’s the problem. In the bathroom, readers may miss what Adam Smith actually, most of it contrary to what he actually wrote and advised, but when senior economists repeatedly advise governments, legislators, corporate leaders, public opinion formers, interest groups and the general public, that the policies they themselves made up, but which they insist authoritatively are attributed to Adam Smith, whose reputation they have lionized, if not credited with sainthood (‘high priest’ founder of economics, and such tripe), in the sure knowledge that few will actually read his Moral Sentiments and Wealth Of Nations (including some, perhaps, in their bathrooms), they get away with the Big Lie, but the rest of us pay, one way or another, for their intellectual treachery.

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Thursday, January 22, 2009

Misreading Adam Smith, I hope Accidentally

From the Princeton University press Blog, announcing a new economics title HERE:

“Adam Smith, Meet Captain Hook: The Upside of Pirate Greed” by Peter Leeson

In 1776 Scottish moral philosopher Adam Smith published The Wealth of Nations. In it, he described the famed “invisible hand.” According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.

Your grocer, for example, wants to serve his own interest—he wants to make money. But to do so he must serve your interest as well. He must provide you with the highest quality groceries at the lowest possible price or you’ll patronize a competitor that does instead. The grocer doesn’t care about you, of course; he doesn’t even know you. He cares about himself, but in serving himself he serves you too
.”

Comment
Peter Leeson, BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University and author of the new book, The Invisible Hook: The Hidden Economics of Pirates and he also blogs at The Austrian Economists, is almost right and spoils the accuracy of his interpretation of the grocer’s pursuit of his self-interest in serving her customer’s self-interest, which in turn serves hers.

Yes, we serve our self-interest best in exchange by serving the interests of others.
But, I am not sure of his accuracy of interpretation in his first paragraph:

According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.”

That is not what Adam Smith wrote. He did not write anything about “as if by an invisible hand”. The quotation marks around this statement suggests that Adam Smith wrote those words; he most certainly did not.

There is no ‘as if’ attached to ‘led by an invisible hand’. Peter Leeson has added them and incorrectly wrapped them in quotation marks.

Also the way the sentence is written implies that Adam Smith was making a general statement applying to all individuals in all cases; he wasn’t.

He wrote about a specific set of individuals (some but not all wholesale merchants) whose risk aversion to foreign trade led them to prefer to deploy their capitals in their domestic locality, despite the higher monopoly-driven profits from trading with the British colonies in North America under the protection of the Navigation Acts, enforced by the Royal Navy.

These individual decisions meant domestic annual product was higher than it otherwise would be, and because the whole is the sum of its parts, the domestic economy, and resulting employment and output, were greater than they would otherwise be.

Having explained all this clearly and adequately, Smith summarises his explanation, with the well-known 18th-century literary metaphor of ‘led by an invisible hand’ (WN IV.ii.9: 456), which applied in this one specific case and ‘in this, as in many other cases’, but not all cases, as the over 70 examples he mentions along the way of self-interests not being beneficial to society in Books I, II and III of Wealth of Nations.

In fact, Smith analyses how prices are determined, how markets work, and how the ‘great orders’ go about their business without mentioning ‘an invisible hand’ at all.

Professor Peter Leeson should have written his sentence as:

According to Smith, SOME individuals pursuing their self-interests are led IN MANY BUT NOT ALL CASES, “by an invisible hand,” to promote others’ interests as well.”

By generalising Smith’s thinking in the manner he did, Professor Leeson repeats the mantra of some ultra-conservative-minded propagandists for State Corporate Capitalism (which they are perfectly entitled to assert in their own names), but their assertions are their own and have nothing to do with Adam Smith.

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Adam Smith On State Expenditures and Interventions

A correspondent asks:

“I'm still puzzled as to where Smith draws the line with regard to government intervention. In Book V, Chapter I, he talks about justice, defence and public works but it seems that he has a wider application for the state in market matters. I'd be very interested to hear your viewpoint on this.

To which I replied:

Yes, it is widely believed, even by some top academic economists, especially on Blogland, that Adam Smith favoured small government, often represented by the phrase, the 'night watchman state', which in fact was coined in the late 19th century by a firebrand socialist.

I have posted this list from my book, Adam Smith: a moral philosopher and his political economy' (2008, pp 247-48, Palgrave Macmillan):

"● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’; (WN464)
● Sterling marks on plate and stamps upon linen and woollen cloth (WN138-9)
● Enforcement of contracts by a system of justice; (WN720)
● Wages to be paid in money, not goods;
● Regulations of paper money in banking; (WN437)
● Obligations to build party wars to prevent the spread of fire; (WN324)
● Rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’);(WN 539)
● Premiums and other encouragements to advance the linen and woollen industries’; (TMS185)
● ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’; (LJ6; 331)
● patrols by town guards, fire fighters and of other hazardous accidents; (LJ331-2)
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); (WN723)
● Coinage and the Mint; (WN478; 1724)
● Post office; (WN724)
● Regulation of institutions, such as company structures (joint stock companies; co-partneries, regulated companies); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (WN758-89)
● Education of people of all ages (tythes or land tax) (WN788);
● Encouragement of ‘the frequency and gaiety of publick diversions’; (WN796)
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population; (WN787-88)
● Encouragement of martial exercises; (WN786)
● Registration of mortgages for land, houses, and boats over two tons; (WN861, 863)
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’; (WN356-7)
● Laws against banks issuing low-denomination promissory notes; (WN324)
● Natural liberty may be breached if individuals ‘endanger the security of the whole society’; (WN324)
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’); (WN539)
● Moderate export taxes on wool exports for government revenue; (WN 879)

Jacob Viner concluded, unsurprisingly, that Adam Smith was not a doctrinaire laissez-faire advocate.

[From Viner, J. 1928. ‘Adam Smith and Laissez-faire’, In ‘Adam Smith, 1776-1928: Lectures to Commemorate the Sesquicentennial of the Publication of Wealth Of Nations, p 53, August M. Kelly, Fairfield, NJ; I provided the references to Wealth Of Nations.]

Second Question:

“How exactly does Smith make a distinction between permissible and unacceptable government intervention? I could justify some of this divergence by considering that much of his criticism of government involvement stems from actual experience rather than theoretical reasoning (which, if used, could rule out regulation all together!). What's your take on it?”

Smith, remember, wrote (Book V) of ‘public works and public institutions’ that ‘facilitated commerce’. It was, and I think, remains, an empirical test, not a theoretical outcome. Markets do not work because of theory, or ‘rational thought’, or who wrote books about it.

He didn’t sit down and think great thoughts about gaps in knowledge from his appreciation of the explanations of others and himself of real world events. That is the way of ‘shamans’, priests and inventors of religious explanations, with everything they cannot explain shunted into the mysteries of ‘invisible beings’ or gods.

The pure theory of markets, such as neoclassical economics and general equilibrium as much that it is meritorious, but it is a theory not a description of how markets actually work.

The players in markets are real human beings, not variables that operate within narrow confines of deterministic mathematics. Consider how Smith chided some of the Physiocrats (mentioning Dr Quesnay by name) for their apparent insistence that the ‘political body would thrive only under a precise regimen, the exact regimen of perfect liberty and perfect justice’… ‘if a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered’. (WN IV.ix.28: p 674)

The message is clear: start with the history, how things arrived at their present day circumstances and arrangements, and observe how they operate, drawing on lessons of how they worked, more or less, well in the past and what that teaches us selectively about what works and what doesn’t, assemble general principles that seem to be of practical benefit to assumed goals, and apply them to current events and trends.

Of course, everything depends on the selection and the objectives. Machiavelli, the Italian political practitioner drew on history to show how rulers ruled in the past and selected common aspects that could apply to rulers in his present (1500s), where the objective function was to remain ‘safe’ in power.

Smith’s objective function was how an economy, the State, and the people, could spread opulence from commerce to the nation, especially the poor majority, drawing on how nations remained stable (justice and the distinction of ranks), became prosperous (the desire of people to ‘better themselves’) given as much freedom to do so (Liberty) without it degenerating into monopoly, restrictive protectionism, and opulence for a minority using their political influence over the State, while leaving the poor as they had been left throughout all history as serfs, slaves, and penurious labourers.

Smith believed that a commercial society was the best opportunity for continual growth and the spread of opulence, and showed in his critique of mercantile political economy, as it had operated since the 15th century and was operating up to the Fall of Rome in the 5th century, what changes might be made by the legislature to let commerce do its work as speedily as was practicable in the real world and not in some kind of impossible utopia.

He was not an ideologue. His understanding of history demonstrated what was possible among real men as they were, not ideal ‘guardians’ of public interest who usually made everything worse than it need be.

Hence, his proposals for ‘public works and public institutions’, which were written in is inimitable style, were apparently quite modest (the incorrect ‘take’ on them by laissez-faire ideologues), though they added to a level of state expenditure that was actually quiet ambitious, with separately argued cases for the items listed by Jacob Viner in 1928 above, which together extended the agenda of appropriate expenditure by a classical liberal state (and even one ran by quite illiberal personnel).

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