Wednesday, August 12, 2009

An Author on the Money

Jed Graham of Investors Business Daily (HERE) writes:

Adam Smith Was On The Money”

“In the fateful year 1776, Adam Smith took aim at Britain's heavy-handed rule of the American Colonies.

"To prohibit a great people ... from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind," he wrote in "An Inquiry Into the Nature and Causes of the Wealth of Nations."

... In a 1780 letter, he labeled his work, in part, as "a very violent attack ... upon the whole commercial system of Great Britain."

In the first three books of the 900-page tome credited with laying the foundation for modern economics, Smith revealed the "invisible hand" that unites the productive force of self-interested parties for the common good.

His work, which earned his place as the most influential economist in history, wasn't just timeless. It also addressed the most pressing issues of his day.
Smith made not just a humanitarian case against colonial suppression, but also an economic one.

He argued that the cost of monopolizing trade with the 13 Colonies wasn't worth the benefit — a marginal increase in the profit that British businessmen might earn: "It is ... a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers."…

Having opted not to follow the religious career path dictated by his scholarship, Smith returned to Scotland. There he studied while living with his mother for two years.

Then opportunity struck. Smith was invited by the Philosophical Society of Edinburgh to deliver lectures. They were a hit, earning him an appointment as professor of logic at the University of Glasgow.

Smith's ambition was grand. At the end of his first book, "The Theory of Moral Sentiments," which explained the natural link between self-interest and morality, he previewed future endeavors. He would attempt to give the world "a system of those principles which ought to run through and be the foundation of the laws of all nations."

"Wealth of Nations," published 17 years later, fulfilled part of his pledge. It was far more than an economic work, Glenn Morrow said in a lecture on its 150th anniversary. "It is a history and a criticism of all European civilization." …

Inspired by Newton, whose law of gravity explained planetary movement, Smith sought a connecting principle governing economics.

Smith perceived man's propensity to barter or exchange skill and labor as central to economic progress. This facilitates a division of labor that, in Smith's example of a pin factory, let 10 workers make 48,000 pins in one day, while a single untrained worker might be hard-pressed to make one.

Smith's intellectual labors were driven by a sense of mission. In his analysis, self-interest spurs innovation and is the surest way to spread wealth to all income groups.

Smith saw dramatic disparities in living standards. In his day, great wealth and overcrowded slums existed in close proximity on the Royal Mile in Edinburgh, says James Otteson, an economics professor at New York's Yeshiva University, whose introduction to Smith's work will be published by Continuum next year.

"He was concerned with figuring out ways to make the people at the lowest end of the economic spectrum better off," Otteson told IBD.

Smith tested his big-picture ideas with the most painstaking analysis.
Taking a decade to write "Wealth of Nations," he collected a wealth of anecdotal and historical information to explain his arguments.

His data ranged from wheat prices dating to 1200 to the price of butcher's meat paid by Prince Henry early in the 17th century.

"The philosophical base of 'The Wealth of Nations' is implicit in all the explicit reasoning about the real world, which Smith has observed in minute detail," wrote Nobel Prize economist Lawrence Klein.

His "Wealth of Nations" provided the first systematic explanation of how an economy functions.

Smith complemented exceptional training with real-world observation and data collection to inform and support his analysis.”

On the whole I found this an impressive, refreshingly original approach in a short piece on Adam Smith’s life and contribution to moral philosophy and political economy. Readers of Investment Business Daily, new to the authentic Adam Smith, will learn a great deal about him otherwise not available in the thousands of usually, low quality, short-journalistic articles reporting the usual wrong clichés about the philosopher.

Jed Graham cites Professors Jim Otteson (Yeshiva University), one of the younger, outstanding Smith scholars writing today, and Lawrence Kline, recent Nobel Prize winner.

However, I have one minor quibble with Jed Graham, and regular readers of Lost Legacy should have spotted it:

In the first three books of the 900-page tome credited with laying the foundation for modern economics, Smith revealed the "invisible hand" that unites the productive force of self-interested parties for the common good.”

The first two books of Wealth Of Nations contain his analysis wrapped in Smith’s historical approach, neither of which mention the ‘invisible hand’. Book III is a broader sweep across history; it doesn’t mention the ‘invisible hand’.

Book IV is a central piece of Smith’s work in a detailed critique of mercantile political economy, which had dominated British government’s political economy since the 1600s (and, would argue, still does to some extent). Only in Book IV does he mention (only once) ‘an invisible hand’, as a metaphor for the conduct of some, but not all, merchants in their preference for the home trade rather than cope with the risks of foreign trade.

The driver was not the metaphor of ‘an invisible hand’ – a metaphor presents a grammatical object in a more ‘interesting’ way. It was in fact the risk aversion of the some merchants that led them to invest locally, even if it was less profitable than investing in cargoes to send or import from abroad.

OK, having said that, let us be clear on the mighty positives in Jed Graham’s piece. He correctly identifies the Wealth Of Nations as a critique of UK mercantile policy, not as textbook of ‘capitalism’, as usually presented by people unaware that ‘capitalism’, as a word, let alone the phenomenon, was not invented in Smith’s life time. The word was first used in English in 1854; the phenomenon of capitalism, as the word implies, emerged from mid-19th century as numerous large capital accumulations became available for serious capital intensive, profit-driven investments.

Jed notes that the propensity to ‘truck, barter, and exchange’ was the main behavioural trait that gradually spread into human relationships from pre-history, with the division of labour within processes and along the supply chains of commercial society, to distinguish some societies that had achieved small but significant advances in the annual output of the ‘necessities, conveniences, and amusements of life’, from those societies that remained fairly primitive in their material products.

Dramatic as were the living standards of the citizens of Edinburgh (living cheek by jowl in Edinburgh’s Old Town - and still standing), they were as nothong compared to the differences in the dependent situation of the meanest ‘savage’ compared to his savage ‘king’, who had the lives of his subjects at his disposal.

Follow the link; Jed Graham’s short piece in Investors Business Daily is worth reading.



Blogger Andres said...

Indeed an impressive piece: it's one of the few I've seen that have the clarity to see that self-interest is not, in the system of The Wealth of Nations, assumed to be a mechanism for necessarily producing a greater collective good. The author clearly sees that self-interest appears as the mechanism that makes humans enter into economic exchange.

12:13 am  
Blogger Gavin Kennedy said...


Yes, you are right.

In seeking a transaction in their self-interest they should (says Smith) address the other party's self-interest and not their own, which is the way we make bargains.

I have no ides who the author is, or from where he took his insight into Smith, but he is mostly right.

If this was the common understanding of Smith there would be non need for Lost Legacy, because it has been found.


9:10 am  
Blogger PRODOS said...

Good morning Dr Kennedy and friends,

Thanks for the link and comments on the Jed Graham article.

I found this reference interesting ...

Of great value was his time in France, where trade restraints to promote manufacturing wealth provided "a sort of museum stocked with the most important errors," Bagehot wrote.

... and was able to locate

ADAM SMITH AS A PERSON. (1876.) - Walter Bagehot ... HERE ...

This looks like a very interesting article about Adam Smith and I´m just this moment printing it out to read and study this afternoon!

I also found interesting the comment that Adam Smith was "Inspired by Newton".

Not surprising, but I´m now very curious to read more about what Adam Smith specifically wrote about Isaac Newton - his achievements and methods.

Best Wishes,

Melbourne, Australia
(Currently visiting the USA)

2:00 pm  

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