Light Blogging for a Couple of Days

Returning from Denver to Scotland via Newark to arrive Tuesday am.

Light blogging envisaged until sometime on Tuesday. If I get a connection via wireless during 4 hour layover at Newark I'll send a message.

I much enjoyed the two conferences that I attended and I return with several ideas for my next book on Adam Smith (yes, another one!), which I think will create a bit of interest.

First, a draft, then a whole lot of research among the papers held in various locations in the UK. Then a publisher and a viable book deal.

The theme is now formed; execution is the harder part (but the most enjoyable).

Peer Review This Morning

I am presenting my paper, 'The Hidden Adam Smith in His Religiosity' (an initial response to Lisa Hill's 'The Hidden Theology in Adam Smith', 2001) to the 'Smith, Morality, and Religion' session of the 26th Annual Conference of the History of Economics Society, in Denver, Colorado.

This is a real test of my thesis that Adam Smith was not a Christian, though a regular attender with his mother of his local Kirk in Edinburgh, was not a Providentialist (though he often used its language), and was not a Deist, though he never expressed any degree of explicit atheism. He was probably agnostic, being unable to explain what was increasingly clear that the religious accounts of the 'final cause' of the world and everything in it were inadequate as an explanation.

Smith, of course, was not informed about Darwin's theory of natural selection, of Mandel's theory of inheritance, or of genetics and Watson and Crick's 'double helix'. From 1785 Smith was aware from his friendship with James Hutton, the geologist, that the age of the Earth was much older than Bishop Usher's Biblical date of 2004 years. The Earth had 'no vestiges of a beginning, no prospect of an end' said Hutton.

In the absence of a credible alternative explanation, though theology, rooted in 'pusillanimous superstition' (his History of Astronomy) was impregnable until evidence emerged, Smith wrote in a barely discernable code that hid his doubts, a not unreasonable protection against the Presbyterrean zealots then prowling across Scottish society searching for heresy, aspostacy, and signs of atheisim.

I shall report on how my colleagues receive my paper.

Which Adam Smith Was Wrong?

Shaun Grovers writes the Schlog blog (HERE):

"ADAM SMITH WAS WRONG"

"At the dawn of the Industrial Revolution, during the Age of Enlightenment, Adam Smith wrote Wealth of Nations. It’s earned him the title “father of economics” and it greatly influenced the founders of America with its argument that free market capitalism was the best economic system available for a society prone to selfishness.

Adam Smith wasn’t just an economist. In fact, at the time, economics wasn’t its own field yet. The best I can figure it was a branch of philosophy mixed with sociology and even a little religion. Adam Smith, for instance, was a professor of Moral Philosophy at the University of Glasgow - not some mathematician or finance guru working as a prof in a business school. That doesn’t discredit him, of course, but it’s something to keep in mind when reading his thoughts: They’re as much a prescription for morality or theology as they are for business practices.

“Adam Smith believed, for instance, that in order for a free market society to prosper, individuals must look out for their own self interests foremost. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Comment
Smith’s observation was that individuals are ‘self-interested’, an assessment with a long pedigree in classical philosophy long before Smith taught his students. But that was not the problem in itself. The main problem was that people depended upon others, mostly unknown others, for their daily sustenance.

Long gone in Europe were the days when individuals sought whatever they could get for themselves from gathering fruits, roots, insects and birds’ eggs in the forest in ‘rude’ societies that were common before farming and shepherding (and still were common in 18th century experience over much of the world, with a few remnants still found today).

Society was more complex (though fairly simple compared to now) and without mutual dependence, largely from the division of labour and the propensity to exchange, common to all people in Europe, and in the ancient stone civilisations of China and India, the mass of the population would soon suffer grosser privations than was already common. There was not enough subsistence available to support distribution by such benevolence as was present to allow everybody, or a majority, to rely on benevolence for their daily survival. It wasn't that benevolence was wanting so much as it would never feed enough people alone.

Smith addressed the prospects for commercial societies (he didn’t use the word ‘capitalism’ nor have knowledge of the 19th century phenomenon), which if allowed to operate without the oppression of existing state-supported monopolies it would continue the spread of opulence to the majority of the population.

Shaun Grovers jumps into assumptions about what Adam Smith said quite clearly and differently, both in Moral Sentiments (1759) and Wealth Of Nations (1776). Smith did not have an idealistic view about human behaviour – he was an observer of how people actually behaved and not how they might behave in an imaginary utopia.

Moreover, Smith dealt in relatives, not absolutes. It wasn’t that the ‘butcher, brewer, and baker’ would behave like perfect boy scouts; given the chance – particularly the opportunity provided by monopoly, a common enough condition under the Guild system that had controlled the supply of food and necessaries in most towns since the 16th century – the butcher, brewer, and baker would behave exactly as Shaun concludes in the substance of his article. The trader would pay more than likely “an unjust wage to his workers, lying about the quality and origins of his products, making promises for immediate gain with no intention to keep them, etc,” and much worse besides.

The Smithian antidote to monopoly is competition, not as an idealistic model, but as the best known remedy to selfish behaviours emanating from monopoly.

The Acts of Parliament that created state-granted monopolies, which often fostered private cartels and 'conspiracies' against the consumers, were often orginally awarded with good intentions (and we know to where those roads lead), and had by mid-18th-century Britain become barriers to commercial growth, jobs and good health.

Smith’s critiques of such government interventions was severe (see Book IV of Wealth Of Nations) – so severe that modern readers often generalise incorrectly his specific remarks about 18th-century government interventions as his supposed opposition to all government interventions, which is far from the case, as regularly discussed on Lost Legacy.

Shaun writes:

“Adam Smith, like I said earlier, came up with his ideas during the Age of Enlightenment - a period characterized in part by radical optimism about the human spirit, denying that all men are born spiritually powerless and corrupt. Ronald Reagan sounded a lot like a modern day Adam Smith sometimes. He was very inspiring but very wrong when speaking about the inherent goodness and strength of mankind: “A people free to choose will always choose peace” or “I know in my heart that man is good” or “There are no constraints on the human mind, no walls around the human spirit, no barriers to our progress except those we ourselves erect.”

Comment
I do not know where Shaun got these ideas from, but they certainly were never expressed by Adam Smith. This leads me to ask if Shaun has actually read Smith’s works, or is he confined to what others have said that the wrote, plus a few quotations out of context?

“Adam Smith was wrong. Free market capitalism might just be the best economic system the world has ever seen. I assume so, but what do I know about economics? I’m a musician. But it doesn’t produce the rosy results Smith argued it would either. A society full of Smith’s imaginary butchers will not benefit the whole of society because the butcher is not inherently good and self-regulating. He does not naturally pay a living wage to his workers. He does not naturally keep his promises. He does not naturally tell the truth at all times. He’s just like me. And just like you. If we serve ourselves with no outside restraints placed upon us, we’ll cheat to get more and horde what what we get while the distance between us and the have nots widens.”

Comment
Having set up an imaginary straw man and called him ‘Adam Smith’, Shaun concludes that ‘Adam Smith was wrong’. What astonishing insight! Sadly, what nonsense too. It’s not that Shaun is deliberately misleading; he is simply uninformed.

And finally:

“Adam Smith’s error may come from his understanding of God. Adam Smith is believed to have been a deist - someone who thinks “The Great Architect” built the universe but then walked away from it, never to return, never getting mixed up in human affairs, never entering the human heart, never putting on skin and becoming a man for man’s sake, never sending Spirit to guide and teach, never to lead his People to be creators of equality and justice and, well, regulation.”

Comment
Shaun here is interesting. Many make similar interpretations of Smith’s alleged ‘Christianity’ and his alleged providential tendencies, and his alleged Deism, but not as clearly as Shaun does.

However, this would take a lot longer to respond to at this time. I am presently in Denver to read my paper, ‘The Hidden Adam Smith in his Theology’ (in part a response to Lisa Hill’s 2001 paper, ‘The Hidden Theology in Adam Smith’).

Readers interested in the current draft of this paper, which answers in some measure the ideas expressed in the paragraph in his article, should send an email to me: gavin at negWeb dot com.

In sum, Shaun Grovers’ article is interesting but flawed by a reliance on the writings of others (mainly ‘rightwing’ Reagonites it seems who describe a fictional Adam Smith invented in Chicago from the 1950s; though he is not enamoured with the ‘leftwing’ either) and not on the work of the real Adam Smith, born in Kirkcaldy in 1723.

There is a world of difference between these two Adam Smiths, and knowing the differences is important, as well as fairer to the Adam Smith born in Kirkcaldy.

Property Rights the Solution, Not the Problem

‘Dan’ at Migrations Blog (HERE): writes: ‘Tragedy of the Commons Still Has Meaning’

“ “The Tragedy of the Commons” is an influential article written by Garrett Hardin and first published in the journal Science in 1968. It’s one of those pivotal articles at the dawn of the environmental and conservation movements, which describes a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared limited resource even when it is clear that it is not in anyone’s long term interest for this to happen. [He?] challenged the philosophical assumption of Adam Smith that decisions reached individually will be the best decisions for an entire society and advocated “social arrangements” that produce responsibility. These arrangements might include some form of “mutually agreed upon coercion”, although perhaps “coercion and incentives” more accurately describes his intentions.

Today, the strongest criticisms of the environmentalist and conservationist political stances, advocating regulatory measures and incentives for directing human industry, are still being voiced by the intellectual descendants of Adam Smith. These critics – Libertarians – continue to take the position that anything benefiting individuals in a competitive economy is good, and any hindrance of those liberties is bad, even when scientists indicate that the opposite is the case.”

Comment
Adam Smith did not write that ‘decisions reached individually will be the best decisions for an entire society and advocated “social arrangements” that produce responsibility.’

This idea, along with the myth of ‘his invisible hand theory’ is an idea that was invented by some modern economists, and propagated since the 1950s by people who have not read Smith’s Wealth Of Nations (1776) or his earlier book, Moral Sentiments (1759).

Dan appears to be one such miss reader of Adam Smith, who gives over 60 examples in Books I, II, and III of Wealth Of Nations, of the malign consequences of individual decisions and their detrimental outcomes for the entire society. Indeed, Book IV of Wealth Of Nations is, what Smith called, a ‘very violent attack’ on the individual decisions of the legislature (and those who influenced its members) in the mercantile political economy, both in domestic and foreign trade, since their initial interventions of governments in the economy from the 16th century.

It is amazing how the notion, honestly presented by Dan I don’t doubt, that Adam Smith wrote anything remotely like
that which he has been credited with since the 1950s by theorists of general equilibrium and neoclassical economics, such as Milton Friedman, Paul Samuelson, most Noble prizewinners and almost all economics tutors in the US and UK. The simple remedy of reading all of Smith should correct the error, instead of relying on a few quotations.

The Tragedy of the Commons by Garrett Hardin was an excellent essay, spoiled by his main obsession in the essay about population growth. He set out to prove the not difficult idea that successive population increases on a fixed area would deplete the natural resources beyond a sustainable state. Diminishing returns (Ricardo) had established such a conclusion in 1817.

Hardin’s excellent point was that the over-exploitation of any natural resource – such as the ancient ‘commons’ of pre-commercial society – would inevitably exhaust the resource, particularly where the resource, like the old commons, was open to all to use.

The proper conclusion, not discussed by Hardin, was to introduce prices for access by removing its ‘free’ status. Each free user is not constrained to limit his use, but would be if property rights were introduced. Of course, this is anathema to most environmentalists, who regard commercial pricing as the cause of the problem when in fact it is the solution.

Thus, when Dan draws on the experience of open, free, access to the fish stocks of the world by whoever has access to fishing boats (which is just about everybody with access to the world’s oceans), he misses the main point of the tragedy of the commons – the free access encourages some – it doesn’t take many – boats to over-fish, which is what has been happening for decades among all fishing fleets of all sea-going nations.

The proper response to the tragedy of the fishing stocks – property rights – is articulated by ‘the intellectual descendants of Adam Smith’, though I suspect Dan’s selection of the people who fulfill his version of who these individuals are may not be the same people that Lost Legacy would identify.

At Last! Great Sense on the Current Crisis!

Dr Madsen Pirie, of the Adam Smith Institute (London) reports on an analysis of the current recession, written by Professor David Simpson: The recession – whodunit? (HERE)

A publication the Adam Smith Institute is particularly proud of is The Recession – Causes and Cures by Dr David Simpson. Dr Simpson was Economics professor at Strathclyde, and then economic advisor to Standard Life. His piece is short, eloquent, and utterly convincing. It forms a crucial part of our counter-attack on the facile but common notion that it was greedy bankers who brought about our downfall.

Not so. Dr Simpson methodically traces the bust's causes to the previous credit-fuelled boom instigated by governments and their central bankers. There were indeed bankers who made foolish (rather than greedy) decisions, and who read risks wrongly. But they did so amid a sea of cheap money which governments had flooded onto them. The asset-price bubbles (which are now bursting or deflating as markets correct the errors) resulted from interest rates deliberately kept too low for too long.

The best way to treat a bust is to avoid it altogether by not stoking up the antecedent boom, but given a bust, the treatment should be lower corporate and personal taxes. These should be financed by spending cuts, not by borrowing which signals future tax rises. And the policy-makers who oversaw this crisis should be replaced.

The book is a terrific read, and puts its whole case in fewer than 40 pages. It is both compelling and convincing. Do read it. (HERE)

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

Adam Smith Did Not 'Invent' Capitalism

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Natasha Chart writes in Sustainable Food (HERE)
Natasha Chart writes in Sustainable Food (HERE)

‘Market Consolidation and Anti-Trust’

“It would have disgusted Adam Smith, the moral philosopher who invented capitalism, to see such powerful monopolies still running the show and claiming to be following the system he proposed to rid the world of mercantilism and all-powerful guilds.

Comment
We know what Natasha means but, for the record, Adam Smith did not ‘invent capitalism’.

The word itself was unknown in English until 1854 (Oxford English Dictionary) and Smith died in 1790. Smith wrote about ‘commercial society’, as practised in mid-18th century.

Moreover, societies are not ‘invented’ by anyone. They evolve of their own volition from the unintended consequences of the actions of individuals over long time periods. Attempts to ‘invent’ societies always fail (e.g., Marxist , socialist and other ‘utopias’, as, nowadays calls for a complete legislative change from modern capitalism to independent, local, entities), and end up with tyrannies unanticipated by their idealistic initiators.

Adam Smith was a philosopher who ‘did nothing, but observed everything’.

He was a fairly severe critic of the existing commercial arrangements of Britain, but also a very moderate realist about the prospects for major legislative changes in the near future. He believed tariff changes would only work if introduced slowly and gradually because of their disruptive consequences for the labourers affected by unemployment, and for the lack of will among legislators and those who influenced them, for example.

He did, however, propose the repeal of the mercantile Acts of the British Parliament, especially those pertaining to the ‘all-powerful guilds’, the Settlement Acts (preventing labourers leaving their parish to look for work in other parishes), the Apprenticeship Acts (preventing skilled and semi-skilled labourers from exercising their skills in places other than where the served their 7-years as apprentices, and preventing the easier spread of new technologies in 'apprentised trades'), and the legislative abuses of the Acts of Navigation (he agreed with the Act in principle when limited to ensuring that Britain had enough seamen and ships to defend it island from naval attack, but thought the all-embracing monopoly of the colonial trade (with North America and the Caribbean) was detrimental to Britain’s (and the colonists’) interests (see Book IV, Wealth Of Nations)

In the event, some of these changes were not affected until the mid (the Navigation Acts) and late 19th century (universal education provisions).

But, of Adam Smith ‘inventing’ capitalism, there is no evidence whatsoever. That he would see modern society as essentially unchanged from 18th century mercantile political economy that he knew so well (timid steps to free-trade in the major economies, like the US and Europe; predominant popular views associated with ‘jealousies of trade’ and beggar-thy-neighbour' popular policies; wars not for defence and often for indeterminate ends; and the dominant practises of local monopolies, etc.,) I do not agree with Natasha that he would be 'disgusted', or even surprised.

Smith well understood the foibles of people, especially in government and the legislatures. In probably the only prediction he ever made - the future supremacy of the USA's economy over all others by the late 19th century - he would feel vindicated
But 'disgusted' - I don't think so.

On the 'Efficacy and the Efficiency of the Invisible Hand'

Du Won Kang writes in The Epoch Times (HERE): “Pathological Nature of Corporations Not Changed, Say Scholars”
in which he has this piece:

“Mistakenly Invoking Adam Smith to Justify Amoral Pursuits”

“According to Ira Jackson, Former Director of Center for Business and Government at the Kennedy School of Harvard University, it is inappropriate for Friedman and others to so often refer to Adam Smith to justify the greedy and amoral pursuit of profits.

Jackson says, “Adam Smith... believed very much in the efficacy and the efficiency of the invisible hand and also wrote as a moral philosopher about the obligation and need for businesses to extend a helping hand… if we go back and actually read Adam Smith, we see that the author… in fact was a moralist himself.” (The Corporation, DVD)

According to Bakan, to base a social and economic system solely on self-interest and materialistic desire is dangerously fundamentalist. He says that this rests on “a distorted and incomplete conception of human nature” because self-interest and materialistic desire are parts of who we are, but not all.

Bakan adds, “No social and ideological order that represses essential parts of ourselves can last, a point as true of the corporate order as it was for the fallen Communist one

Comment
I am not familiar with Ira Jackson (though he has a pedigree of some standing), and I know nothing about Du Won Kang. That he writes, apparently:

“Adam Smith... believed very much in the efficacy and the efficiency of the invisible hand and also wrote as a moral philosopher about the obligation and need for businesses to extend a helping hand… if we go back and actually read Adam Smith, we see that the author… in fact was a moralist himself”, suggests it has been a long time since he read Adam Smith, either in his Moral Sentiments (1759) or his Wealth of Nations (1776).

What Ira appears to have read recently, and throughout his distinguished career, are the assertions of most modern about what Adam Smith was supposed to have written, but didn’t.

Adam Smith never believed in “the efficacy and the efficiency of the invisible hand” and never wrote anything remotely like that in either of his books.

He only used the metaphor of ‘an invisible hand’ once each in those two books (and once in reference to the Roman heathen god, Jupiter, in his early essay on Astronomy, published posthumously in 1795). That make only three times in over a million words, and in none of these cases did his references have anything to do with markets.

Strange, given the modern claims of reputable economists, who should know better, plus the thousands of people who simply copy from Google the assertions of economists, that where Adam Smith writes about markets and how they work, such as in Books I and II of Wealth Of Nations, he never mentions the invisible hand at all.

The myth of the ‘efficacy and the efficiency of the invisible hand’, for myth it is, cannot be found in Adam Smith. It was an invention in Chicago in the 1930s and was spread widely from 1948 by (Chicago and Harvard graduate), Paul Samuelson in the 18 editions of his famous textbook, Economics, and by Milton Friedman and George Stigler in their numerous popular lectures and columns, until it is now believed to be true.

I suggest that Ira Jackson, and all other believers in the myth of the ‘invisible hand’, try reading Adam Smith’s Wealth Of Nations (Book IV, chapter 2, paragraphs 1-9, page 456).

They could also read my paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ (HERE) in which I state the case for my assertions above.

Lost Legacy Resumes Its Services

At last I am connected to the Internet in Denver (Colorado) via Radio Shack's help (16th Street).

It may take some time to wade through my Internet general correspondence , including numerous trolls hitting on manufactured indignation (some of them 'withdrawn' by their authors; not censored by me), the like of which I have never seen before outside of first-year students in their little cabals.

The Summer Institute for the Preservation of the History of Economics at the University of Richmond, Virginia was a great success, composed of (serious) graduate, post-graduate students in economics, philosophy and history, plus many of the 'big names' in the disciplines represented, and myself, a humbler contributor of several interventions in the sessions and one paper ('The Hidden Adam Smith in his Alleged Religiosity') which was received very well.

I flew across from Washington (Dulles) to Denver this morning for the History of Economics annual conference. I shall present my paper again, but with the benefit of the positive comments and discussion from Richmond, and a growing conviction that I am onto something new in Adam Smith studies.

After Denver, I shall post my revised paper and set about a thorough treatment, perhaps book-length and in suitable journal formats.

Thanks for your patience.

Light Blogging Again While En Route in USA

I am attending a couple of academic conferences over the next week on the history of economic thought in the USA and until I re-connect I shall be light blogging, if at all.

My paper, 'The Hidden Adam Smith in his Religiosity', will be presented, all being well, at the Summer Institute at the University of Richmond, Virginia and the Annual Conference of the History of Economics Society at the University of Oregon, Denver.

Both conferences have a whole raft of papers from the international community of scholars on many different themes, and I shall attend every session that I can to appreciate the latest thinking on every aspect of ideas about economic thought.

When re-connected, I shall report on what is going on in this subject area, both among those at the 'top of their game', as we say in Scotland, and those post-grad students marking out their progress to their future recognition.

Promising Abstract on Adam Smith's Stance on Religion

Ross B. Emmett (James Madison College), write in First Amendment Scholarship Update HERE: in Man and Society in Adam Smith’s Natural Morality: The Impartial Spectator, the Man of System, and the Invisible Hand .

An abstract states (in part):

“One often hears the argument that Adam Smith’s Theory of Moral Sentiments provides a basis for the construction of a morality independent of a religion based on revelation. Central to this argument is Smith’s impartial spectator, whose study of human motivation through observation of the diversity of our actions shapes our capacity to both judge the motives of our present actions and inform our future ones. To the extent that one’s moral imagination attends to the impartial spectator, one’s judgment of actions will conform to a moral standard founded on human experience rather religious revelation.”

Comment
I picked out this paragraph (ignoring for this purpose some other remarks in the abstract on an ‘invisible hand’, having said plenty about The Metaphor recently) because it states something with which I completely agree.

It is absolutely right in my view that “in Adam Smith’s Theory of Moral Sentiments provides a basis for the construction of a morality independent of a religion based on revelation”.

Smith is clear that experience is the forming force of infants learning about appropriate moral behaviour – defined as those behaviours acceptable to others – and that such learning is not ‘innate’ in a God- implanted moral faculty (Francis Hutcheson).

A society of thieves and murderer refrain from stealing for or murdering each other; a society of Jews follows the Mosaic code; Mormons follow Joseph Smith’s code and Presbyterians follow their code (similarly with Muslims, Hindu's, and so on).

It is not clear if Ross agrees with this notion from his opening words: “One often hears the argument”, which usually is a prelude to disagreeing with the statement that follows.

It is also a phraseology similar to that used by Adam Smith throughout Moral Sentiments when he makes statements about religious doctrine and beliefs to the effect that he dilutes their religious undertones.

Ross’s statement that “one’s judgment of actions will conform to a moral standard founded on human experience rather religious revelation” is similar to that which I noted from my reading of Moral Sentiments for my paper: ‘The Hidden Adam Smith in his Alleged Religiosity’, available from the address at the head of this page.

Widespread Use of The Metaphor, But Nothing to Do With Adam Smith

Tomdonovanvoiceover writes in Tom Donovan Voiceover Blog (HERE):

“The Invisible Hand”

“Used to be The Invisible Hand, a term first penned by Adam Smith, an 18th century Scottish philosopher, referred only to free market dynamics and the trading of goods and services.

He had in mind an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens and nations he believed produces greater abundance and contributes to increased individual and collective happiness.
In essence, he was thinking about the reasons to employ one’s time gainfully. You see, Mr. Smith believed a benevolent God steers the Universe to maximize our bliss. Work produces wealth. Wealth produces happiness. Work is divine, or nearly so, anyway.

Nowadays, his metaphor is assigned to all manner of things, good or bad, economic or not.”

Comment
I chose this piece on the invisible hand metaphor, not for its economics or its historical lack of accuracy, nor even for its religious errors, but as an example of the unintended consequence of a few very smart economists caught up in their triumph over the anti-capitalist challenges of foreign communist systems and domestic socialist (or is that ‘liberal’) critical voices, inventing a quasi-plausible (they had read the Texts, hadn’t they?) attribution to a famous progenitor of their science that shrouded their formal models with a mystical, absolutely unscientific glow.

As long ago as 1876, critics in the British Academy queried why political economy was included in Section F as a science, given its heterogeneous nature, both with pretensions to being a science and with major exhibitions of its unscientific nature, melded as it was with religious, quasi-religious, and sociological vague notions of types.

From the 1950s, the science of economics reached a maturity and coincidentally adopted mystical allusions of an inherent harmony of forms, blessed with an invisible and redundant entity leading its elements to act in the manner which their psychological states would bring about anyway.

For the record, the metaphor of an invisible hand was not “first penned by Adam Smith” (it was a well known metaphor in the 18th century and has a much longer lineage back into classical times: see my ‘Adam Smith and the invisible Hand: from metaphor to myth’: email me at the top of the page for a copy).

Adam Smith’s use of the metaphor did NOT refer “only to free market dynamics and the trading of goods and services” – it didn’t refer to these categories at all!

It appeared in a late chapter of Wealth Of Nations (Book IV, chapter 2) in regard to the consequences of risk aversion in terms of their “own security” of some, but not all, merchant traders, who because of their risk aversion they preferred to invest locally rather than in foreign trade. Having explained these circumstances, Smith slipped in the metaphor, for the only time in Wealth Of Nations.

He did NOT have “in mind an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens and nations he believed produces greater abundance and contributes to increased individual and collective happiness.” He never mentioned the invisible hand in Books I and II (where he discusses “an uncoordinated and unregulated exchange of value – a “this for that” proposition between citizens”.

Mr. Smith did NOT believe that “a benevolent God steers the Universe to maximize our bliss.” As a moral philosopher he taught the views of many philosophers, ancient and modern, without necessarily asserting to his students that any one of the many philosophic systems that he taught were true, as can be seen if you read his Moral Sentiments (1759).

In fact it is quite clear that such assertions are not true (see my: ‘The Hidden Adam Smith in his Alleged Religiosity’, which can be obtained by emailing me at the top of the page).

Tom Donovan may believe that “Work produces wealth. Wealth produces happiness. Work is divine, or nearly so, anyway”, but that is nothing to do with Adam Smith’s ideas.

UPDATE

Tom has edited his original blog entry HERE
It is well worth reading as amended because he incorporates what is the correct presentation of Adam Smith in relation to the invisible hand metaphor and the correct presentation of opinions about hsi religous views.

Well done, Tom.

Light Posting for a Good Reason

I am busy grading examinations for my former day job and must get them completed before I leave for the two conferences in the USA next week. Hence, light posting.

Apologies, but duty calls.

Gavin

'The Hidden Adam Smith in his Alleged Religiosity'

IMPORTANT NOTICE

ADAM SMITH’S LOST LEGACY HAS BEEN MOVED BY “BLOGGER”, THE HOST SITE, TO A NEW ADDRESS:

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TO FOLLOW ALL 2083 POSTS (AND COUNTNG) FROM HERE TO 2012 AND BEYOND, PLEASE USE THE NEW ADDRESS.

THANK YOU

Gavin Kennedy

My paper: ‘The Hidden Adam Smith in his Alleged Religiosity’, to be presented at the History of Economic Thought, 10th Summer Institute, University of Richmond, Virginia (22 June) and at the Annual Conference of the History of Economics Society, University of Colorado, Denver on 27 June.

It is now available for readers of Lost Legacy (email me for a copy). I expect it will be revised after the presentations – ‘good reason must given way to better’ (Shakespeare, Julius Caesar).

I introduce biographical indicators (which many scholars have ignored) to account for Adam Smith’s strange behaviour in his Theory of Moral Sentiments (1759), in which he deliberately modified, diluted, and in some cases quite brazenly turned away from presenting his alleged theology in a truly Christian or purely Deist manner, particularly in the last 6th edition he edited in 1789/90 and published weeks before he died.

The contrary view to mine (and a few others) that Adam Smith was ‘deeply’ religious and wrote with consistent theological undercurrents, such as offered by Richard Kleer and Lisa Hill: Kleer, (Kleer, R. A. 2000. ‘The role of teleology in Adam Smith’s Wealth of Nations’, History of Economics Review, 31: 14-29; Hill, L. 2001. "The hidden theology of Adam Smith," European Journal of the History of Economic Thought, 8(1): 1-29), is fairly dominant among Smithian scholars at present.

I intend in future to respond directly to these and other authors, but in the meantime I make my case indirectly, such as through the title of my paper which indirectly responds to Lisa Hill’s article.

For a copy, email me at Lost Legacy.

Markets and Panglossian Invisible Hands

John Markley writes “Review of Economics for Real People” at ‘Suite 101’ HERE

“Gene Callahan Provides an Excellent Introduction to Basic Economics”

“Next, Callahan expands from a single person to a group, bringing in the essential subject of exchange. With exchange come concepts such as specialization, division of labor, and comparative advantage. He also explains how market prices provide information that guides buyers and sellers and makes coordination possible without centralized direction of control, creating the famous “Invisible Hand” of Adam Smith.”

Comment
A promising announcement for educating people about economics, then the inevitable kick in the tail that invents a metaphor into a concept, and spreads the mystical ‘non-explanation’ about how markets work.

The myth about Adam Smith and his use of a metaphor in three quite different circumstances and adds to the substitution of science by mumbo-jumbo’.

Variously, users of the metaphor credit it with semi-conscious powers (quite good for a disembodied invisible hand), affecting all transactions indiscriminately, even when the participants pursue selfish and evil ends – a sort of utopia dominated by naïve optimism, associated with Panglossian ideas, sometimes related to religious ideas about God’s providence.

In the economic theory of general equilibrium – finally proven mathematically in the 1950s – exponents often drift off the mathematics and resort to the metaphor of the invisible hand, which is fine, of course. After all, the metaphor was quite popular in literature in the 18th century (and from long before in classical times), but it often was to do with murderous scenes, interventions by the gods and God, and mysterious things that ‘go bang in the night’.

But it was not Adam Smith’s allusion, particularly. Three references in a million words – none of them to do with how markets work – makes its use and attribution somewhat of an exaggeration, convenient may be, because it gives the prestigious gloss of a renowned figure in the history of economics to a pure. modern theory of an imaginary world without real humans present, but also dangerous, as recent events show leading to a financial crisis.

Remember the context (always remember context!) in the 1930s when Chicago University faculty introduced their oral allusion to the economy being guided by an ‘invisible hand’. This was the decade of the twin scourges of National Socialism and Soviet Communism coinciding with the Great Depression. Capitalism was under challenge and the notion of a superiority of the market dominated USA guided by the peaceful, amazing, and pacifistic “Adam Smith’s invisible hand”, unlike the state-managed systems of Germany and Russia, guided by the bloody fists of Gauleiters and Commissars, was attractive to nationals and refugee immigrants together.

Fast forward to the late 1940s, and Oscar Lange and Paul Samuelson, both from Chicago in the 1930s, each introduced the invisible hand, linked by name to Adam Smith into the literature of economics. Samuelson’s economics 101 textbook, Economics, published in 1948 and then through 18 editions, and translations, became an educational phenomenon across campuses worldwide. Its Keynesian macro-economics exuded confidence in capitalism and markets and responded to the needs of the West during the Cold War years with the Soviet Union.

Hardly noticed too, was the item on page 36 (1st edition), proclaiming, if cautiously to be sure, the metaphor of the invisible hand, which also spread across the discipline and took on a life of it own as each instructor interpreted it to suit. By the end of the century, the invisible hand, transformed from a metaphor into a ‘theory’, ‘ a concept’, even a ‘paradigm’, and was generally believed to be embedded in Wealth Of Nations and to be central to Adam Smith’s analysis of how markets work.

Few economists ever bothered to read Wealth Of Nations for themselves and to see how and where Smith used the metaphor, and in what context. They were taught, and believed, that Smith gave it a major role in markets, and because they were confined to the quotation in which he talks generally of ‘every individual’ seeking to make use of his capital to maximise his profit and how this produces the best result for society, they repeat the connection with disciple-like intensity whenever anybody challenges this interpretation.

Armed with these certainties, they accord to markets powers and consequences which they never had: the power to produce the ‘best of all possible worlds’ irrespective of the intentions, or the limited goals, of entrepreneurs and corporations. Some capitalist econoimies work better than others; some cannot even get started.

Currently, in the present crisis, scores of former-disciples of the invisible hand are rejecting markets (and Adam Smith) with the haste of those woken up to the crash of their illusions and what they have been taught and taught themselves.

Yet, if the went back to Wealth Of Nations and actually read the whole chapter, or even paragraphs 1 to 9 of Chapter 2, Book IV, they would see, perhaps for the first time, that Adam Smith fully explains the behaviours of some – NOT all – traders by their degree of risk avoidance in their decision to invest locally or in foreign trade with the British colonies in North America, or the European continent. Their actions are driven by their ‘own security’; those less insecure than others engaged in foreign trade and those more insecure than others engaged in local trade.

In what way are they ‘led by an invisible hand’ to do what their degree of insecurity compels them to do anyway? I have never had a direct answer to that question in all the years of the Lost Legacy Blog.

That Metaphor Again

“Quotable: Invisible hand or invisible foot?”
In Freedom Politics by Gary Galles preposted by R. Lee Wrights in on Rational Review HERE:

“Important people are commemorated on their birthdays. But the birthdays of some, such as Adam Smith, history’s most famous economist, are unknown. However, we do know he was baptized on June 5, 1723, making it an appropriate time to remember him. Smith is most remembered for articulating how the ‘invisible hand’ of market interactions can coordinate a society based upon liberty — i.e., private property and voluntary exchange — more effectively than the coercive power of the state. Unfortunately, Smith’s crucial insights are overlooked by politicians who talk of liberty, but legislate and regulate away its center piece — voluntary arrangements.” (5 June)

Comment
Smith is ‘most remembered’ for what modern economist in mid-20th century attributed to him (Paul Samuelson, Milton Friedman, etc.,) incorrectly in respect of an invisible hand of ‘the market place’.

Smith’s use of The Metaphor referred to the risk-avoidance of some, not all, merchants who thereby preferred the home to foreign trade. He didn’t use The Metaphor in Books I, II, III and V of Wealth Of Nations, though non-readers of his book would get the impression that the metaphor of an invisible hand is used throughout his magnum opus. It isn’t; only once does he use it in Book IV after describing why merchants prefer home to domestic trade – in consideration of their ‘own security’.

Long before the 18th century, societies legally protected ‘private property and voluntary exchange’ and had laws about contract. Liberty came later, slowly at first (the long struggles in feudal societies across Europe from the 11th to the 17th century) and then fairly rapidly from the 18th to the 21st century.

Liberty is about the rule of law, not men; Habeas Corpus; trial by juries; independent judiciaries; separation of powers; freedom of speech and assembly; and accountable governments.

Adam Smith criticised the mercantile political economy of his day, and in many shapes and forms its essential characteristics still function in all modern societies (Big Governments, protectionism, subsidies, tariffs and prohibitions, jealousies of trade, and hostile trading policies).

Extraordinay Outburst Against Adam Smith

In British intellectual history, the name of John Ruskin for some reason stands out. The ‘soft’ left seem to adore him as do many modern environmentalists (often the very same people).

I am reading ‘Wealth and Life: essays on the Intellectual History of Political Economy in Britain, 1848-1914’, by Donald Winch (Cambridge University Press, 2009), loaned to me by a colleague for my summer, off-piste, reading.

And a good read it is turning out to be, perhaps because I have a loose acquaintance with the work of its subject personalities, in the chapter I am reading (4 to be explicit, which covers ‘Ruskin’s aversion to Mill’ - that is John Stuart Mill)and Harriet Taylor, his wife). I admit ‘loose’ probably is too strong a word for my actual familiarity, such as a skimmed reading of Mill’s Principles of Economics (1848), the most read
19th century economics textbook at university - until replaced by Alfred Marshall’s Principles (1890-1924).

Donald Winch, to be sure, is the doyen of historians of economics, highly regarded for good reason by his peers and those aspiring to become so. I read his shorter book, Adam Smith’s Politics (1967), a few years ago and it is in my library (I bought a second-hand copy for a few pounds and have consulted it several time since).

I was reading Wealth and Life this morning on my way home on a bus from a morning coffee with my retired geologist friend (parking is impossible in the centre of Edinburgh with the construction of a new tram way) and I found this astonishing attack (page 91) on Adam Smith by Ruskin:

“Adam Smith was ‘that half-bred and half-witted Scotchman’ who had taught the ‘deliberate blasphemy’ that ‘thou shalt hate the Lord thy God, damn his laws, and covet thy neighbour’s goods”. (The Complete Works of John Ruskin, 1903-1912. vol. XXVII; 764, and XXIX: 134; 212; 282; London: George Allen & Unwin).

Ruskin didn’t think much better of Mill and said so in print. Extraordinary behaviour for a self-proclaimed Christian (?) gentleman. Ruskin took ad hominem debate to a whole new (low) level.

Yet he is still lauded for his artistic sensibilities by many people today!

As they say in parts of England: ‘there’s nowt so queer as fowk’ (Google it for a translation).

In the meantime, buy a copy of Wealth and Life by Donald Winch.

Alternative Histories: not proven

Neil Craig writes in a ‘A Place to Stand’ HERE:

"THE FAILURE OF FREE TRADE LIBERALISM - VICTORIAN BRITAIN"

“I have made it clear I believe that free enterprise, free trade & traditional liberalism is the most successful way to run an economy & modern practice shows this. Yet there is one quite overwhelming counter example. Up to about 1850 Britain was easily the world's leading industrial power. At that stage it repealed the Corn Law tariff by the Importation Act 1846 which represented the triumph of Adam Smith's commitment to free trade & of the liberal ideal. Yet by 1914 Britain had fallen to 3rd place behind the USA & Germany, both of which, while no bastions of socialism had significant tariff barriers. Indeed Bismark's Germany did have a significant amount of government, if not planning, at least encouragement of particular industries.”

Comment
But what would have been the effect of not repealing the Corn Laws on Britain’s relative place in the table?

Much else happened both in Britain and in other major economies. The 19th century decades were also the years of the second British empire, which drained off capital investment in either defence expenditures (military technologies were increasingly expensive to acquire and to service with men and materials leading up to the First World War) and overseas unproductive state administration, added to which the far more significant overseas British investment which soared in North America. All of which reduced productive domestic capital investment in Britain.

Case: not proven (as we say in Scotland) either way.

Markets as a First Choice

“There’s a real distinction between being in favor of free markets and being in favor of whatever business does”, from a heading in Death and Taxes Blog reporting a lunchtime talk and subsequent Q & A session between Milton Friedman and the audience HERE: http://politics.randomplayground.net/2009/06/02/theres-a-real-distinction-between-being-in-favor-of-free-markets-and-being-in-favor-of-whatever-business-does/

Comment
It’s not clear if Milton Friedman actually put it that way, but it is pretty clear from his talk and answers to questions that he did not exempt businesses from criticism for their actions in practice.

How could he? He already had the excellent example of Adam Smith noting almost unanimously in Wealth Of Nations the scheming monopolistic tendencies of ‘merchants and manufacturers’, small groups of tradesmen in the town Guilds system seldom meeting even for merriment and diversion and ending up conspiring to raise prices, and he knew how legislators and those who influenced them proposed legislation that benefited their business sponsors by curtailing supply with tariffs and prohibitions to widen their markets and raise prices.

In short, for over 250 years businesses pursued their individual self-interests precisely in their self interests. The antidote was not, is not, nationalisation or regulation; it was and remains extending competition through freer markets.

I remember listening in astonishment to an MP, shortly after Mrs Thatcher’s government deregulated the exchange in foreign currencies so that licensed people could open little Bureau du changes in the high street to compete with local banks. The MP complained that in his constituency these new licensed exchange bureaus were charging much more to trade foreign holiday currency than the local banks. ‘It is a rip-off’, he cried, and wanted legislation to stop it. And this was a Conservative Party MP!

The answer, instead’ surely was to publicize the higher prices and the profits. That’s all it would take to induce new entrants into the exchange rate business in pursuit of the alleged ‘high’ profits, and let competition do its work (which is what happened, eventually).

Freer market advocates do not defend all, or any specific actions, of business entrepreneurs; they advocate using markets were possible to allow the impartial gales of competition to discipline market behaviours and benefit consumers.

You don’t need to introduce battalions of inspectors (and their plus premises, supervisors, pensions, and expenses) to patrol the country looking for ‘excess profiteering’ – and battalions of lawyers to be engaged in prosecuting and defending alleged profiteers. Nor does it require business personnel to meet in lobbying organisations – with their expensive staffs and insider contacts – to look after their interests, monitor legislation proposals, and generally subvert the independence of the legislature (and compromise the integrity of 'insiders'. Competitive markets are the best available instrument.

In that prescription, Lost Legacy and Milton Friedman are in agreement with Adam Smith.

Two Errors in Respect of Adam Smith

David Ross writes ‘Attacking the foundations of freedom’ on Big Lizard Blog HERE:

“Falling somewhere in between, would be a political philosopher such as John Rawls, who believes that individual freedom and the capitalist system that derives from it is only moral if the poorest people benefit too. Yet a utilitarian philosopher could argue as Adam Smith (admittedly an economist, not a philosopher) did, that individual freedom and capitalism produces the greatest happiness for the greatest number, even if doesn’t distribute that happiness evenly.”

Comment
Can you spot where David Ross demonstrates two fundamental flaws in his argument?

If not, then I worry about the standard of discourse in Blog land and in the private lecture rooms of pedlars posing as academics around our campuses.

A Professor Speaks and Gets it Wrong

Pavlos Hatzopoulos interviews Yannis Stournaras (Professor of Economics at the Department of Economics, University of Athens and research director of the Foundation for Economic and Industrial Research) – ‘The economic crisis and beyond’ in Public –re-imagining democracy HERE:

‘Adam Smith, on one hand, believed that all the problems of society would be solved by the “Invisible Hand”; Karl Marx, on the other hand, believed that they would be solved by the “Dictatorship of the Proletariat”. Well, I think this says it all. We need realism and realism demands that we must neither be on the side of Adam Smith’s “Invisible Hand’’ nor of Karl Max’s ‘Dictatorship of the Proletariat”. Those systems were tested and failed; what happened recently was indeed their tombstone.’

Comment
Well that ought to be easy then. Adam Smith never said anything so silly as leave it all to ‘an invisible hand’. Modern economists, mainly due to Chicago influence on the teaching of economics from the 1940s, assert such ideas, calling a metaphor a ‘theory’, a ‘paradigm’ even’ and attributing it to Adam Smith, without deigning to open Wealth Of Nations (or Moral Sentiments) and reading it for themselves.

One would have hoped, but clearly ought never to expect, that a Professor Economics and a research director of a prestigious university would have checked what Adam Smith said in Book IV, chapter 2, of Wealth Of Nations (the whole chapter please; not just a quotation torn out of its context) for himself. He might also have wondered how the single use of a metaphor in Wealth Of Nations became such a one-word summary of nearly a million words of Smith's thinking.

Adam Smith even wrote ((Book II, chapter 2, Wealth Of Nations) on the need to regulate banks behaviour in an area that was suffering current problems in 1772, after the Ayr Bank crisis, namely the issuing on bank promissory notes for small denominations of currency, then convertible into gold or silver on demand:

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

Without a doubt, this does not correspond in any way to the assertion of Professor Yannis Stournaras (nor the interviewer, apparently) that Smith ‘believed that all the problems of society would be solved by the “Invisible Hand’, does it?

Add to this example the others in the same chapter about unregulated banking behaviour and the vulnerability of banks to over-trading and re-drawing of bills to hide insolvency, and Professor Yannis Stournaras has some way to go before he can legitimately summarise Adam Smith’s work in a misleading phrase.

Harsh words? Yes. But Professors and Research Directors have no excuses for tramping on Adam Smith’s legacy. I suggest that Professor Yannis Stournaras reads my paper, 'Adam Smith and the Invisible Hand: from metaphor to myth’ HERE, and follow up with reading both Smith’s Wealth Of Nations and Moral Sentiments (or even the whole of Smith's chapter 2 in Book IV which he quotes from).

On Karl Marx's singular policy summary I have no comments.

Adam Smith and J. M. Keynes

Natural Economics in My Fox (Dallas Fort Worth) HERE:

“While reading “Biblical Economics” by R. C. Sproul, Jr., I learned about Adam Smith, history’s first economist, according to Sproul. Smith espoused the theory of the “invisible hand”. Quote from the book: “Simply put, the invisible hand is the force that takes the combined interests of all members of society and creates a well-ordered marketplace.”

I learned that Adam Smith’s theory (Nature and Causes of the Wealth of Nations, published 1776) starkly contrasts with that of John Maynard Keynes. Smith’s ideas are the foundation of contemporary conservative thought; Keynes’ ideas drive contemporary liberal thought that government manipulation produces a “more ordered and prosperous society than that produced by the blind forces of nature working in a free market.”

I wanted to discover their respective belief systems to better understand their values. It seems to boil down to this: Adam Smith advocated savings and Keynes thought too much saving was a market evil. Smith believed in natural market equilibrium – Keynes believed government should regulate markets to manage stability.”

Comment
So many fallacies in a short article, apparently derived from R. C. Sproul, Jr and his book, Biblical Economics, which is unreliable (putting it politely).

“Simply put, the invisible hand is the force that takes the combined interests of all members of society and creates a well-ordered marketplace.”
That is not something that Adam Smith ever wrote, nor did he ever espouse ‘the theory of the “invisible hand”’.

Modern economists in the 20th century ‘espoused’ such a theory, but not Adam Smith. It was their theory derived from the oral tradition in Chicago University in the 1930s and given life by the modern theorists of general equilibrium.

See Paul Samuelson, the main source for the modern myth in his textbook, Economics (1st to 18th edition), and the hundreds of thousands of his readers, and the people they went on to teach until millions believed it across North America and English speaking campuses.

I have developed the case against the modern interpretation of the invisible hand myth in my recent book, Adam Smith: a moral philosopher and his political economy’, 2008: Palgrave Macmillan) and see also my paper, ‘Adam Smith and the invisible hand; from metaphor to myth’ HERE.

It is untrue that ‘Smith believed in natural market equilibrium’ – he suggested that natural prices (costs of supply) are ‘continually gravitating’ towards its ‘central price’, but he said no more than that, because market prices(quantity effectively demanded) – those actually paid by consumers and received by suppliers - are influenced by factors that are not directly involved in determining costs or effectual demand.

And remember, Smith’s prices are generated by ‘neighbourhood’ averages in every different ‘general circumstances of the society’ including ‘natural or improved fertility of the land’, to which we can add the composition of labour (skills, dexterities, machines facilitating and abridging its productivities) and access to capital and entrepreneurship.

Equilibrium is unlikely in these circumstances, especially as the division of labour is never static and supply chains increase labour productivity in ‘distance’ and complexity.

Keynes on savings addressed a different problem to Smith on savings. Briefly, Smith saw growth as an outcome of what revenue earners from the ‘great wheel of circulation’ did with their earnings. He was dealing with a less sophisticated mid-18th-century economy than Keynes was in the mid-20th century. Capital was relatively scarce and capital formation was really quite primitive and local.

Landlords were seen to dispose of their landed income with tendencies to prodigality, except for those ‘improvers’ who invested in draining land, fertilizing it, erecting fences, and repairing buildings and machinery.

Labourers, because of low wages, tended to spend their incomes without savings, except those fewer labourers who obtained supervisory positions, who tended to save small amounts and lend out at interest.

Stock-holders, the organizers of productive activities, tended to be the main savers, who added to their capital employed in their businesses what they saved from their profits to buy subsistence materials for supplying additional labourers between pay days, and to buy raw materials and machinery. The rest of their income they spent on consumption, as did landlords and labourers.

Smith observed, as savings were the sole source of investment, frugal savings were a social benefit; prodigality was a social menace. Wasteful government expenditures (the Seven Years War cost Britain £125 millions from taxation) plus the other sources of misplaced government interventions.

There was an inverse relationship between subsistence (when it became prodigality) versus investment (frugality). The more the employment of labour and capital stock, the higher the 'slow and gradual' rate of capital accumulation could be (compound interest). The greater was consumption ( when prodigality), the lower the slow and certain growth of employment and capital stock.

For Keynes, two hundred years later, and in a incomparably larger economy, with a much bigger role for government, he saw savings (hoardings) as a reduction in aggregate demand, which contributed to unused idle resources and unemployment. He suggested that governments should fill the employment gap by increasing public expenditures. These were not, are not, uncontested, indeed, his were controversial policies which featured for a large part of the 20th century.

I am not sure that Sproul’s Biblical Economics has much to add to the debate, except at the level, perhaps, as the Book of Job.

Adam Smith on State Intervention

Confessions of a Bipolar Virgin (31 May) HERE:

“First, let's analyze some of the things that happened to people during the Great Depression. Unfortunately, when this awful event in U.S. history happened, there was no unemployment compensation, no FDIC, no SEC, and none of the fiscal and monetary policies we now have in place. In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire). This proved to be a disaster (at the time) and Keynesian Economics quickly became the new "economic theory" in place (long story-LOL!). Keep in mind that this is a very SIMPLE description and I am keeping a LOT of IMPORTANT facts out of play here (note: we still have Classical Economics in place today, as it does serve a purpose).’

Comment
The author self-describes himself/hereself as ‘bipolar’ (a modern term for depressive) and I am commenting in the hope of lessening the load by explaining what Adam Smith actually wrote in Wealth Of Nations (1776) and its difference from what he is alleged to have written, with a view to elucidate the controversy about what to do in the current situation.

‘In a sense, it was a total free market system, guided by Classical Economics (i.e. Say's Law and Adam Smith). The most prominent economic work of this time frame was Adam Smith's book "The Wealth of Nations" that introduced the theory of "The Invisible Hand." This theory states that the market is governed by an "invisible hand," and less interaction by the government in the market, the better (i.e. laissez faire).”

What Adam Smith actually advised was that the wrong interventions in a commercial market by government should be, first, reversed and secondly those wrong interventions should be avoided, and other interventions of governments should be encouraged. This is not the same thing as being against government intervention as a whole. He wasn’t of the opinion ascribed to him by modern economists since the 18th century. In fact, Adam Smith advised that certain interventions, not in his time undertaken with much consistency by government, should be undertaken as soon as possible.

For example, besides government expenditures on defence against foreign invasions (not defence expenditures to intervene in European dynastic quarrels and wars for trivial ends, including defending loss-making colonies) and on the provision of systems of justice, minimally such as independent judges, jury trials, Habeas Corpus, and the rule of law, not men.

He suggested what amounted to a substantial public investment in public works, such as roads (Britain’s roads were appalling, right into mid-19th century), public bridges, safe harbours, and canals, as well as public investment in a national educational system through a ‘little school’ in every parish (about 60,000 of them!) to educate all boys between 6 and 14 (at the time the mode was not to educate girls in public schools, only at home), in ‘reading, writing, and account’, with a smattering of geometry and such skills useful for earning a living and be productive.

Public expenditure was to be paid for initially from taxation on the richer sectors of the population and their maintenance financed by charging tolls or user-charges of public facilities for the costs of repairs to roads and bridges, plus subscriptions according to potential means to pay for teachers, books, and school prizes, and to pay for palliative care for sufferers from ‘leprosy and other loathsome diseases’.

Government also should develop the postal service for public use (it was originally set up by government to monitor control of the nation’s territory by regular contact with its farthest reaches), it should provide assay officers to determine hallmarks on gold and silver bullion, and on quality standards of woollen goods, cloths and paper. It should also run an official mint to guarantee the purity of the coinage. He also was in favour of a central bank (the Bank of England) to manage government debt and to introduce necessary regulations to stop drawing and redrawing bills of credit and over-trading, to set maximum interest rates, and the minimum amount denominated on the promissory paper notes issued by private banks.

Altogether, this is a formidable list even for the 18th century, contrary to his modern image of him being against government intervention on some sort of laissez-faire (incidentally, a term Smith never used) principle. What then did Smith consider inappropriate for government intervention?

The list is quite specific and is wrongly interpreted as being directed at all government interventions. Smith’s Wealth Of Nations is not a textbook of economics as we understand it today. It was a critique of the mercantile political economy of British governments from the 16th century, which still dominated public policy making in the 18th century (and in many respects still does so today in various forms).

Legislators and those who influence them are susceptible to all kinds of erroneous ideas about how commercial societies work; fads and fancies are spread with conviction that have no scientific basis, much as the everyday observation that the ‘sun rises in the east and sets in the west’ led people to believe that the sun (and the planets) orbited the earth. Indeed, for millennia it was an article of religious faith, against which those who questioned it were dealt with severely (think of the famous case brought against Galileo).

Among mercantile fallacies were such notions as the balance of trade required to be positive in favour of exports, so that a nation could accumulate stocks of gold and silver (which the King could use to fight wars against neighbours - you can see why kings were easily converted to the nonsense!).

From this fallacy, policies of protection against imports were developed, supported by tariffs and prohibitions, even though this meant that large numbers of goods cost domestic consumers much more from higher prices (and profits) than importing them would have allowed – you can see why many ‘merchants and manufacturers’ were enthusiastic true believers in this fallacious idea, and still are!

Moreover, the obsession with high bullion stocks led to ‘jealousies of trade’, in which nations adopted hostile stances to neighbours, some of it spilling over into wars, unofficial piracy and destruction of foreign shipping and ports – you can see why the 18th-century military and navy were enthusiastic proponents of ‘national glory’ from heavy investment in war-making!

Smith opposed such government interventions because they held back mutually advantageous trade from which peaceful trading countries could increase the opulence of their peoples. Many of the trade items added to the long lists (which grow ever longer) of protected trade were derived, not from economic principles or national secureity but from the lobbying of legislators and the hiring of influencers (with not a little bribery) on behalf of domestic ‘merchants and manufacturers’, who profited by narrowing the supply and widening the higher-priced market for their goods.

The richest countries in the world today still engage in such fallacious policies, not just against each other, but also against the poorest countries, for which the richer countries' taxpayers spend small fortunes each year in subsidies, gifts and donations, not to make them richer but the ameliorate their poverty induced by less trade than they could otherwise enjoy.

At the time, Smith observed that certain domestic laws also made matters worse, such as the award of monopolies to the chartered Guilds in towns for the production and processing and selling of scores of goods, and which prohibited outsiders in nearby towns from competing in the markets and fairs of other towns with better goods at lower prices.

These Acts were supported by the Statute of Apprentices which required ‘skilled’ tradesmen to serve 7-year apprenticeships in the town where they wished to trade, keeping out equally good tradesmen from elsewhere by law. James Watt, an apprenticed instrument-maker was not allowed to ply his trade in Glasgow because he had served his apprenticeship elsewhere (fortunately Adam Smith persuaded the university senate to appoint Watt to the University where he worked for several years and began his researches on steam power, essential for the future industrialisation of the world).

Perhaps the worst example of government intervention were the Acts of Settlement preventing labourers from moving from their home parish to another one in search of work.

Altogether, Smith considered these government interventions a breach of natural liberty, introduced originally for arguably good reasons (the development of trade in Britain), but through time generating unintended consequences. In fact, they became major obstacles to the development of free trade in goods and work opportunities in Britain, which together would have fostered the emergence and extension of a commercial society and the spread of opulence through to the majority of the very poorest families in society earlier than happened, for which, of course, the poor paid the highest price.

From experience of legislators and those who influenced them – and Smith met and conversed with, and listened to, members of this exclusive club, from opinionated individuals through to Cabinet ministers and Prime ministers – and he did not think highly of their business judgement and acumen.

He observed that the complexity of the detail in any business decision was formidable at any level beyond the most basic – if demand rises for your products make more of them; if it falls produce something else – and such decision-making was best left to the dispersed individuals involved who profited if they were right and lost if they weren’t, and should not be assumed by any ‘single person [or] no council or senate whatever, and which nowhere [would] be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it’ (WN IV.ii.10: 456).

It is that passage which exponents of the distorted view that Adam Smith opposed all interventions of governments across the board base their enthusiastic convictions upon, forgetting (or not being aware of – not all ‘expert’ quotation-spreaders read Wealth Of Nations) how specific Smith was about the important and necessary role of well-managed State in providing support for the working of a commercial society, which today is bound to be larger than in the 18th century, though not as large as most modern state sectors have become.

In so far as Bipolar Virgin recognises that there is a role for State interventions in certain specific areas - private enterprise where possible, state interventions only where necessary - we may find agreement in a truly Smithian manner.

[Note: I have not taken up the mythical metaphor of the 'an invisible hand' on this occasion: see my paper: Adam Smith and the invisible hand: from metaphor to myth HERE