Sunday, September 27, 2009

Adam Smith No Ideologue

Baron Bodissey writes long articles in the “Gates of Vienna” (HERE)and is connected (how, is not clear) to The Fjordman Files HERE the themes of which are too complex, long and not related much to Lost Legacy’s focus on Adam Smith.

The Scottish philosopher Adam Smith, professor at the University of Glasgow, published his famous The Wealth of Nations in 1776 where he argued in favor of freedom of enterprise. Government should interfere with commerce as little as possible and limit itself to three primary duties: Provide defense against foreign invasion, maintain civil order with courts and police protection, and sponsor certain indispensible public works and institutions that could not make adequate profit for private investors. Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The “invisible hand” of free competition would gradually lead to increased wealth for all.”

Comment
I take the view that if Baron Bodissey is wrong in both detail and in general about a small paragraph from his long histories of the world, such as Adam Smith’s role in his big-picture spectacular history of everything, I expect the rest of his article may well contain similar errors too.

When Adam Smith wrote Wealth Of Nations he was no longer a professor at a University of Glasgow. He left the university in 1764 to undertake tutorial duties with the Duke of Buccleugh in a tour of Europe (1764-1766, during which he commenced writing his famous book from lectures notes from his professorial stint (1751-64), published in 1980 as Adam Smith’s Lectures On Jurisprudence (1978; Oxford University Press) and possibly from notes of his Edinburgh lectures, 1748-51. Wealth Of Nations took from 1764 to 1776 to write and was published in 1776.

Smith did not write in favour of “enterprise”; he wrote in favour of “commercial society”. The former is a projection of a modern word onto the past; in fact, he displayed throughout Wealth Of Nations strong suspicions about the conduct of “merchants and manufacturers”.

To summarise Smith as saying that “Government should interfere with commerce as little as possible” is another back projection onto the historical facts. It conflates Smith’s “violent attack” on the conduct of political economy in mid-eighteenth century Britain, in the form of “mercantile”, government-sponsored, monopoly privileges granted as favours to special interests, as promoted by individual legislators, and those who influenced them, often associated with bribery and other favours (of which the East India Company was a prominent example), with modern misinterpretations of Smith’s legacy by his epigones.

Smith was not opposed to government-directed activities, and those he specifically advocated were not minor aberrations. Defence was a major expense in the annual budget – the seven-years war with France cost £120 millions – and it remained a major budget item well into the 19th century. The defence sector employed tens of thousands annually, both in the defence establishment (unproductive soldiers and seamen) and in productive defence employees, manufacturing defence supplies for a profit for the defence establishment. Technologies associated with defence, shipping, navigation, charts, overseas exploration and bases, and foreign relations, played a major role in the changing domestic economy and in British international trade.

civil order with courts and police protection” was an absolutely crucial pre-condition for the development of a domestic commercial society. It was not just an “expense” to be minimised in a sort of 19th-century “watchman state”. Without justice, society would “crumble into atoms” and “a man would enter an assembly of men as he enters a den of lions” (Moral Sentiments II.ii.4: 86). With the growth of commerce, the role of contracts proliferated and was reflected in the administration of law, and the professions of lawyers.

Smith’s observation is inadequately stated as “indispensible public works and institutions that could not make adequate profit for private investors”. This is a major task, the scale of which is hidden in the brevity of Baron Bodissey’s sentence.

The appalling state of roads in 18th-century Britain required the building of thousands of miles of roads; the construction of canals, likewise; and the dredging of the hundreds of harbours around Britain added to a major capital investment in both the building and, crucially, the annual maintenance of this infra-structure on a scale that mocks the dismissive assertion that this policy was one requiring the government to “interfere with commerce as little as possible and limit itself” to a few minor tasks.

Assuming that Smith’s suggestions for government were adopted by an 18th or a 19th-century government, it would have required the substantial commercial activity of scores of commercial firms for the profitable building and maintenance of the infra-structure, spread over many decades.

That the building of these projects could never repay the projectors (Smith’s original point) did not mean that they could not make a profit for building and/or maintaining them if the government funded their erection. How they were to be funded was a matter for the public finances (fight fewer wars?), which does not in any way limit their economic impact given existing relationships between government funding (defence, is classic) and commercial suppliers of the means (infra-structure builders). Most ‘watchman-state’ attributors to Adam Smith miss the point.

[Of course, the notion of the ‘watchman state’ is wrongly attributed to Adam Smith; it was actually invented as an idea by Ferdinand Lassalle, the 19th-century, fire-brand socialist – Adam Smith, once again was innocent).

Baron Bodissey in identifying Smith’s “limited” role for government to “indispensible public works and institutions”, missed out saying anything about “public institutions” (even missing the adjective, “public”, as used by Smith in Wealth Of Nations), which is somewhat sad because the sheer scale of intervention that would have been necessary to put his recommendations into effect hides the extent of the prime role of education he envisaged for a commercial society.

Briefly, to erect a “little school” in every parish would have involved more than 60,000 such schools across the country – though Scotland already had “little schools”, having started on mass education in the 1600s). Add the teachers for such schools to the simple buildings, and book supplies, this was a formidable undertaking – if it had been taken up.

Smith discusses the role of government (Book V, Wealth Of Nations) under the heading of public finance – budget items and taxation. He does not disucss the role of intervention of a legislative kind. He was ferociously critical of much government legislative intervention – the creation of monopolies, protectionism and barriers to trade, jealousies of trade, and wars cause by such, and the imposition of various statutes (Apprentices, Settlement, Guilds, Patents of monopolies, and such like), and colonial policies. This does not mean he did not envisage a regulatory role for government.

Smith advocated certain other roles too. Among these there are his call for government intervention in special cases, even when such regulations are “a manifest violation of that natural liberty”, as the issuance of “promissory notes” for small sums (WN II.ii.84: 324), a small step in 18th-century banking, but one that was bound to expand with the expansion of commercial banking . Smith associated such interventions with the building of party wall to prevent the spread of fire, as common sense, not excluded by ideology.

Baron Bodissey ends his ommision-filled paragraph with “Smith made the pursuit of self-interest in a competitive market the source of a natural harmony and equilibrium. The ‘invisible hand’ of free competition would gradually lead to increased wealth for all.Lost Legacy readers will recognise the multiple errors in Baron Bodissey’s summary of Smith’s view wrapped in two sentences.

The derivation of “free competition” from the “invisible hand” (or vice versa) uses a redundant metaphor, which explains nothing and, being a metaphor, is not required to do so, and misleads by inferring the actual existence of such a entity (see Lost Legacy passim).

The metaphor of “an invisible hand”, used only once in Wealth Of Nations (Book IV.ii.9: 456) was really about the arithmeticl rule - 'whole is the sum of its parts' – the more merchants who invested locally, in preference to foreign trade because of their aversion to the risks of losing sight of their capital, the larger would be total local investment and employment.

Many merchants continued trading internationally profitably despite the perceived risks. This outcome – larger local investment and employment would result whatever the competitive, or non-competitive, commercial society, ergo, the invisible hand metaphor had nothing to do with competition – it was to do with profitability tempered by risks.

Baron Bodissey links conclusions from modern general equilibrium theory (“free competition would gradually lead to increased wealth for all”) and not from Wealth Of Nations.

“Increased wealth for all” is not contingent on free competition; “increased wealth for all” would be greatly assisted by “free competition" but has not yet been experienced so far, except in tiny pockets for short periods of time. Mercantile distortions on commerce have long been prevalent and despite them, a gradual increase in wealth has been experienced by large proportions of the populations of all commercial societies over long periods (in Britain’s case, since the 16th century).

There are no “invisible hands” guiding commercial societies; there are only the powerful affects of markets, distorted, hampered, and inhibited by the local institutions and habits prevalent in particular societies. Markets work despite obstacles put in their way (ruinous interventions, wars, civil strife, cultural prejudices, politics and religions). Some work more efficiently than others.

Smith observed and understood. He didn’t expect the utopia of free trade to occur, he didn’t perceive that “natural liberty” was an essential pre-condition for the “progress to opulence”. He was not a visionary, nor a ‘man with a mission’. He was a moral philosopher, not ideologue.

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2 Comments:

Blogger Don said...

As per usual, your description of Adam Smith's views are essentially the same as mine. What's shocking is that this description of govt isn't very different than what I see now in the US, especially as it concerns the Banking and Financial Sectors:

"To summarise Smith as saying that “Government should interfere with commerce as little as possible” is another back projection onto the historical facts. It conflates Smith’s “violent attack” on the conduct of political economy in mid-eighteenth century Britain, in the form of “mercantile”, government-sponsored, monopoly privileges granted as favours to special interests, as promoted by individual legislators, and those who influenced them, often associated with bribery and other favours (of which the East India Company was a prominent example), with modern misinterpretations of Smith’s legacy by his epigones."

Isn't that a description of our US Welfare State?

Don the libertarian Democrat

7:29 pm  
Blogger Gavin Kennedy said...

Hi Dom

I am afraid to say it is all too familiar. So-called "croney capitalism" is all too familar with anybody acquainted with 18th-century Britain.

Today, the State-Capitalism relationship is too close - and that means both sides of the relationship, the state included with its bountiful dispersion of bounty and cosy access by lobbyists (and advisors).

Gavin

11:40 am  

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