Saturday, July 04, 2009

Uncovering Crucial Aspects of Smithian Growth Theory

Tim Hartford, author of a new book (7 August) ‘Dear Undercover Economist’ (Little Brown), who blogs at the ‘Undercover Economist’ blog HERE, also writes a regular column at HERE: , yes a busy underground economist too (but then he is good at what he does).

Try this for example:

Why getting complicated increases the wealth of nations

One of the defining characteristics of the modern economy is that it’s awfully complicated. Even a fairly humble product such as a shirt might incorporate cotton from west Africa, oil from Indonesia to make the polyester in the button (manufactured in China), and designs sketched out by an Italian using American computer software.”

Tim paraphrases Eric Beinhocker, author of The Origin of Wealth, quoting Brad Delong’s (
calculation of the relative balance of access to product complexity of tribes people among the Yanomamö living by the Orinoco River compared with the New Yorker tribes people living by the Hudson River. Brad estimated the ‘income’ gap as $90 for the Yanomamö compared to $36,000 for the New Yorker.

Putting this into product complexity terms and using the retailer’s Stock-Keeping Units’ measure (SKUs) of access to available product types, this equates to a few hundred – several thousand at the most generous estimate – SKUs available to the Yanomamö tribes compared to several ‘tens of billions’ available to New Yorkers. See Beinhocker, E. D. 2006, The Origin of Wealth, Evolution and Complexity and the Radical Re-Making of Economics, Harvard Business School Press, Boston, pp 8-11 [Recommended, but ignore Beinhocker’s quoting the myths about Adam Smith’s ‘invisible hands’].

This would probably not have surprised Adam Smith, who emphasised the importance of specialisation as a source of the wealth of nations. Specialisation and complexity are closely linked: an economy with more specialists is one that requires more teamwork and more distinct interactions between individual activities.”

Adam Smith most certainly would not have been surprised.

Consider the issues raised by the complexity and abundance of SKUs of high significance in Adam Smith’s treatment of the division of labour and its necessary entwining with complex specialisation.

While the ‘pin making’ example in Wealth Of Nations has achieved world-wide recognition (though its accuracy is under challenge from the French economist, Jean-Louis Peacelle; see his 2006 article: ‘Adam Smith’s use of multiple references for his pin-making examples’, European Journal of the History of Economic Thought, 13:4, pp 480-512), the far more significant attention that Adam Smith gave to the manufacture of the labourer’s common woolen coat in Wealth Of Nations (WNI.11: pages 22-23) is almost totally neglected today.

Yet, Smith identified the complexity issue long before it attracted much attention until recently. I compiled a small table (in my Adam Smith: a moral philosopher and his political economy, 2008, Table 6.1, page 106, Palgrave Macmillan, Basingstoke) to illustrate Smith’s insightful realisation of the importance of comparative complexity for relative wealth experience in different economies, and indirectly why some economies are wealthy and other poor, from observation of:

the accommodation of the most common artificer artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.”

Tim recognises that identifying complexity, or ‘round about’ supply chains “is not the way that most economists think about what makes countries rich. It is not that they disagree, simply that they tend to focus on more easily measurable aggregates, such as the total stock of capital and labour.”

To which we could lay a heavy responsibility on ‘most economists’ for their modern notions as to what is important in their subject area. By neglecting the appropriate starting point of their inquiries – such as, Wealth Of Nations, for example, they became fixated with “more easily measurable aggregates, such as the total stock of capital and labour”, and cannot see the wood for the trees (or vice versa!), or, if you like, the are still looking under the lighted lamp-post and not in the darker alley.

If you consider Allyn Young’s seminal article in the Economic Journal, 1928: (‘Increasing returns and economic progress, vol. 38: pp 527-42; available HERE:), you will see how the complexity of the supply chain and the increasing sub-division of specialised production right-along the chain, mainly quite independent of the final destination of the complex products, makes possible the ever widening abundance of SKUs that become available to their populations.

Smith noticed this in his concluding paragraph in Wealth Of Nations, Book I, Chapter 1: pages 23-24:

Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.”

Tim Hartford’s article should be read to see how he links this Smithian view to modern differences among exporting countries active in world markets today. It is well worth reading.



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