A Lost Legacy Open Book Discussion (II).

After Adam Smith: a century of transformation in politics and political economy, 2009, Murray Milgate and Shannon C. Stimson, Princeton University Press, Princeton and Oxford.

There is no doubt that the popular (and academic) portrayal of the lifetime-works of Adam Smith is quite at odds with the actual contribution of the Adam Smith born in Kirkcaldy in 1723. It’s as if a completely new persona was invented bearing limited resemblance to him or his surviving works (sometimes referred to on Lost Legacy as the 'Chicago Adam Smith').

I sometimes wonder if anything similar happened to other historical figures from the ancient worlds of Greece and Rome – spectacularly in the case of Jesus – and the thousands who stand out in the great Pantheon of those who are known to us today for their places in the history of human endeavour.

We have The Glasgow Edition of The Life and Correspondence of Adam Smith, from Oxford University Press (and the low cost Liberty Fund editions): The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth Of Nations, plus his extant essays, The History of Astronomy (1744-<1758) and Origins of Language (1761). To these we have surviving student notes of his lectures, Jurisprudence (1762-63) and Rhetoric and Belles Lettres (1763), plus the surviving Correspondence of Adam Smith, and, most important, the definitive biography, The Life of Adam Smith (1996, 2nd ed. 2010) by Ian S. Ross.

We ought, therefore, to be pretty sure as to what constitutes Adam Smith’s oeuvre, but instead of his works being a model of pure scholarship, they are riven by contrary, incompatible, and mutually exclusive opinions as to what he wrote and what he meant, much of it advanced by scholars of indisputable integrity.

However, there is even considerable doubt as to the exact words he used to express his ideas, despite the ready availability of all of his works to whomsoever wishes to consult them – sadly, many scholars pontificate with the certainties of the highly opinionated, who clearly have not read his works for themselves or have forgotten what they may claim to have read years ago.

Now, something must have happened in the 219 years that separate his death from today. It’s not all down to elementary scholarly slackness. Ideas about the past, and the people who lived through them, do not form in a vacuum. Adam Smith – contrary to trite media assertions – did not write his books as veritable bibles; he was not the ‘high priest’ of economics; he did not ‘invent’ capitalism; not was he the manic believer in ‘laissez-faire’, and other similar nonsense (Smith neither used the word ‘capitalism’, nor ‘laissez-faire’).

Readers influence the accepted meanings of what an author writes (see, for instance, Willie Henderson, Evaluating Adam Smith: creating the wealth of nations’, 2006, Routledge). Smith's readers are no exception, and because Adam Smith’s name is often quoted (excessively so today) in support of, or as the problem of, current controversies in the (mis)management of economies, it adds to the intellectual – and popular – confusion as to what credence should be given to this or that declamation on one side of the other of those making the noise, which passes for political discourse in this first decade of the 21st century.

Lost Legacy readers will know that I am researching at present the origins of the spread of the notion of an actual (or metaphorical) “invisible hand” in the teaching of economics since the 1940s. From that teaching came forth consequential policies in business and government as students graduated and entered the “ordinary business of life”, and applied their teachers’ wisdom, either within society generally or in their own teaching careers. A conceptual virus spreads like the biological kind.

Earlier this year, I discussed Steven G. Medema’s excellent, The Hesitant Hand: taming self-interest in the history of economic ideas (Princeton University Press), which covered a slice through history from Adam Smith to 20th-century welfare economics. This fits well with what I am about to undertake with the book by Murray Milgate and Shannon C. Stimson, which takes a broader sweep through the first hundred years from Adam Smith to the end of the 19th century.

It short, Milgate and Stimson have studied how the “grand ideas” that are attributed to Adam Smith are “as much the product of the gradual modifications and changes wrought by later writers”, such that we “are much the heirs of later images of Smith as we are of Smith himself”. I concur with Milgate and Simson in at least this brief survey of their book (I have yet to read the details, which I shall share with you over the next week or so).

I consider from reading their introduction that this is an important quest for all scholars and students of Adam Smith. If their method is correct, and it substantiates their hypothesis, the similar hypothesis embedded in my current research will have stronger foundations.

I, and many readers of Lost Legacy, have lived through the last half of the 20th century, in which “the gradual modifications and changes wrought by later writers” on the unchanged original exposition of the ideas of Adam Smith lie in pristine innocence in his texts. Therefore, we can compare and contrast his original ideas with the “later images of Smith”, which are often a long way from those we read in the works written by “Smith himself”.

How we got from what Adam Smith wrote to what modern economists assert him to have written is an interesting study in the history of intellectual dilution. Murray Milgate and Shannon C. Stimson may have written the first part of that history; we shall discuss that proposition over the next week or two.

Modestly, I would hope that I can emulate their work, as I tackle the intense dilution of Smith’s work in the second-half of the 20th century, which dilution began, almost tentatively, in the late 19th century.


[Thanks to Robert Vienneau, who hosts the Thoughts on Economics Blog HERE: http://robertvienneau.blogspot.com/, drew my attention to Milgate and Stimson’s new book in a message commenting on Lost Legacy earlier this month.]

A New Slant on Adam Smith's Use of the Invisible Hand Metaphor

A New Slant on Adam Smith: must be read HERE

“In a Word or Two, Placed in the Middle: The Invisible Hand in Smith’s Tomes
by Daniel B. Klein and Brandon Lucas"

"Abstract: The meaning and significance of Smith’s expression “led by an invisible hand” has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase “led by an invisible hand,” at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression “led by an invisible hand” occurs pretty much dead center of the 1st and 2nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides “often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration.” (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith’s thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith’s famous phrase."

Comment
Readers will know that Daniel Klein and I have been engaged in civilised debate in the pages of Econ Journal Watch (May and Sept) HERE, HERE and HERE
on the significance of Adam Smith’s use of the metaphor of “an invisible hand”.

Daniel has prepared a most interesting paper, which he believes supports, at least indirectly, his mainstream interpretation of the major significance of Smith’s use of the famous metaphor and its modern associations across the discipline. It is an original and careful piece of work and I hope many readers promote the link to it on their own Blogs.

I have read through the paper quickly and can commend it to you. It is worth reading. I shall review the arguments on Lost Legacy when I have studied it more carefully.

The Incorporated Towns Were Bad, but the East India Company Was Worse

Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964 edits
UNDERNEWS (‘the online report of the Progressive Review’) (30 October) HERE:

“RECOVERED HISTORY: MEET THE REAL ADAM SMITH”

“…Adam Smith is routinely and thoughtlessly invoked as the founder of modern capitalist though, based on unrestrained trade, limited government, and the mechanics of market economies. To this day, The Wealth of Nations is held up as the espousal tome for free-market ideology that decries government regulation, excessive taxation, and wealth redistribution (in whatever contrived shapes it may take).

As Chomsky notes, Smith saw the East India Company and other stockholding corporations as bending state policy towards the good of the few at the expense of the many. Smith to this end was in favor of heavy-handed government regulation to prevent financial and corporate powers from manipulating government policy for their own ends. This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Comment
Much as I agree with the drift of Sam Smith’s post – after all, it recognises that the Adam Smith myth was invented in the 20th century (and the 19th century before that with assertions that Smith supported laissez-faire, though he never said so himself) – I am compelled to apply the same standards of accuracy as I would demand of a modern purveyor of the myth.

The East India Company was a private company, granted a Royal Charter by government on behalf of the sovereign, which operated nearly a year’s sailing away (nearly two years there and back) in India, and, thereby, well-beyond the ability of the government, and, as important, the ordinary shareholders, to monitor, by Smith’s accounts, the appalling behaviours of its officers and servants. Smith’s strictures against the Company are detailed in Wealth Of Nations (Book IV and V).

However, the quotation offered is quite separate from his discussion of the behaviours of the Chartered Companies in Book V. It comes from Book I, on an entirely different subject:

“This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (WN I.x.2.27: 145)

This is part of a discussion of the role of the ‘towns corporate’ in Britain, where the old Trade Guilds still held sway: ‘Inequalities occasioned by the Policy of Europe’ (WN pp 135-59).

The inequalities that Smith speaks of were those associated where “the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance” (WN 135), in particular ‘the “exclusive privileges of corporations”, or the “incorporated trades”.

To be employed in commercial activity in towns, the person had to serve a seven-year apprenticeship under a master, who was restricted to two apprentices only. Without an apprenticeship, served in the town, nobody could open a shop for trade (this happened to James Watt in Glasgow – he had served his apprenticeship elsewhere; Smith got a job for him at the University of Glasgow, just across the town boundary).

It was to these ‘tradesmen’ that Smith referred – small, single-trade shopkeepers and artisans, who owned their own little businesses and who exercised a monopoly of their trades in an “incorporated town”, who tended to exact monopoly prices for their merchandise or artisan services, and who swore to only buy from other incorporated tradesmen for any other items that they required, even where unincorporated tradesmen could supply at lower, more competitive prices.

In short, the Incorporated trades were a cabal of monopolists, living of their monopoly prices at the expense of the public.

But, be clear, these incorporated town monopoly trades and the tradesmen running them had nothing to do with Chomsky’s version of the East India Company, a massive international monopoly company operating East of the Cape of Good Hope to India and beyond,and behaving appallingly.

The local tradesmen who met for “for merriment and diversion” were small fry compared to the East India Company. Chomsky, apparently, conflates the two monopoly cases together.

Sam, a well-experienced journalist, knows of the importance of accuracy. So should Chomsky.

Almost Right But Not Quite

Rev. Dr. Marilyn Sewell writes on “Economics and Religion” HERE:

“A word about the ancient god of the free market system, Adam Smith. When Smith is quoted regarding the "invisible hand" of the market, what is conveniently forgotten is his assumptions about the conditions necessary to make free markets work. Smith assumed that we would operate on a small scale and so would know the character of the people we trade with. He assumed that our financial dealings would exist in the context of our values. Instead, Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Comment
Smith was not an “ancient god of the free-market system”.

He regarded primitive belief in gods as “pusillanimous superstition” (his History of Astronomy, 1744-58; published posthumously in 1795 on his direct instructions just before he died in 1790).

He did not have a theory of the “invisible hand of the market”.

The rest of the paragraph as a statement of his broad views is acceptable:

“Smith's writing is used to justify the mad pursuit of shareholder profit, which is held to be holy and untouchable.”

Modern interpretations, and not a few inventions too, of Smith’s views are almost wholly wrong. Dr Marilyn Sewell, a minister of the Christian religion, is excused. I presume she wrote the above in good faith.

The Significance of Property - Again

Bruce Web is in debate with me HERE: and we both are stuck in conceptual confusion about the meaning of property – is it purely a legal term, distinguished by its codification by jurists and authors, or was it a quite unintended development by unknown people in the very distant past of pre-history, and to which the codifiers and the great judicial minds came much, much later, long after property-rights were practised and enforced by local violence?

The attempt, below, is to set the scene so that we may move on to the relatively short, six-centuries of struggle for Liberty (since medieval times), which manifested itself in such isolated, though significant events – in the consequences they had eventually – as, in England, Magna Carta (and the declaration of Arbroath in Scotland).

This was followed by a long, slow and gradual process from which liberty took its modern forms in the separation of powers, trial by juries, independence of the judiciary (for life and good behaviour), Habeas Corpus, the executive elected by universal suffrage and subject to an independent parliament, with powers of impeachment of the executive, freedom of speech, separation of Church/Mosque/Temple from the State, and rights of assembly. (I outline these aspects in chapter 16 of my “Adam Smith’s Lost Legacy”, 2005, Palgrave Macmillan.)

Property is a human phenonmenon, which in my view pre-dates legal forms and norms which came to be associated with it in recorded history (c.8,000 ya). In the forest, aeons ago, while Homo sapiens were forming through the speciation of the Hominines (from c. six million years ago, right through to the appearance of the first, fully humans c.200,000 years ago), primates were distinguishable from those that shaped and used stone-tools and those that didn’t (broadly speaking). At some time, some humans discovered the use and management of fire, learned to make covering using animal skins and vegetation, and to select and use natural materials for digging, processing, decorating and, on occasion, protecting themselves (and attacking others).

These skills were spread widely among human groups and for most groups these technologies and the knowledge that enabled learning, while relatively sophisticated compared to other species, were the norm (with languages) for all humans for much of prehistory.

Some tribes actually ‘lost’ some of these skills, examples being the tribes of Fuegans of South America, and those Aborigines cut-off in the island of Tasmania with rising seas levels, which tribes reverted to even more primitive living than their ancestors in the rest of South America and Australia, both of which were described by Europeans who visited them in the 18th–19th century, as the “brutes”.

The important thing is that while racists took the 'brutes' as representative of all tribe cultures, they were in fact the exceptions. But they had no notions of property as a possession and appear to have ‘lost’ the basic knowledge of subsistence-craft too; the majority of the world’s tribes practised early notions of property, albeit of a very primitive quality.

Property, through most of its pre-history, and the first millennia of recorded history, had no connection with its legal forms which came much, much later. Quoting legal ideas – early Roman, Norman, English or French law and such like - is not appropriate.

Our focus should be, for these discussions, on the role that property ‘mine’, ‘ours’, ‘their’s, and ‘yours’ – played in practice, long, long before literate societies recorded even crude details of its manifestations.

We should also not get hung up on later ideas about the lineage of property in its proto-modern forms. Nobody knows which tribes first ‘discovered’, ‘invented’, or ‘conceptualised’ forms of property. We can trace only the slimmest of evidence of the evolution of property (‘meum and tuum’; mine and thine), mainly by archaeological stone remains and clues from folk myths (which may be wildly inaccurate). It is almost certain that no one tribe of humans (or race groups, black, white, yellow, brown) can make a claim to be the originator. Stone tools were common in East Africa from long ago.

We do know that somewhere, sometime, and by somebody, property appeared from human action, not by design, somebody’s genius, or a ‘great leader’. It is the distinguishing characteristic of humanity; in its physical forms, it separates us from all other primates, past and present. It may have been a mixed blessing.

Property enabled the alpha males and females of a tribe to claim and exploit its territory and the people within it (the latter, a long established behaviour set among other primates); similarly within families, with allies, and individuals as the benefits of property (as a resource also to ensure obedience) became manifest.

Access to subsistence was related to the evolution of property (better tools, easily carried, replaced quickly; larger domains, natural obstacles to movement overcome; baskets for carrying food, and babies; heavier clubs and longer wooden poles to deal with predators; and so on).

With better and regular subsistence, life-spans increased, and populations increased too. Of course, all this was net of local losses from bloody conflict. Successful tribes grew larger, more mobile, more dangerous to distant neighbours – and their womenfolk – and the long journey to property in the forms of herding and farming began, not in a straight line, and not always in one direction.

John Locke summed it up in the phrase: “In the beginning, all the world was America”, using North America’s native tribes as the standard mode of subsistence of pre-Mediterranean, Egypt, Babylon, India, China, and Europe (and for non-Roman parts of 17th-century Europe, including the Highlands of Scotland).

Property distinguished the property-less ‘brutes’ from the property-abundant humans, especially after the division of labour and the “propensity to truck, barter, and trade” became established.

The correlation between property and rising total subsistence is manifest. Note, a rising total GDP did not mean, necessarily, a rising per capita GDP for long periods; per capita GDP remained static mostly, including from the 5th to the 15th century following the fall of Rome (except in plague years).

Our ancestor’s rulers diverted considerable subsistence into ‘civilised’ artefacts in stone buildings, walls and roads, and all the trappings of military might, which sometimes, along with plagues and famines, destroyed the very basis of their ‘civilisation’. All that dreary experience of history changed with the sustained rise in per capita incomes and, of course, total GDP from about 1800 onwards.

Should we continue our discussions, the above, very roughly, is where I am coming from conceptually.

Unfair to Adam Smith: his philosophy accords with modern psychology

I return to another article in Psychology Today (HERE), this time written by Darcia Narvaez, Associate Professor of Psychology and Director of the Collaborative for Ethical Education at the University of Notre Dame:

“Moral Landscapes Living the life that is good for one to live: The Cultural Airspace of Harmony Morality, Which emotions does your cultural airspace promote?

“Although the philosophers David Hume (1751/1998) and Adam Smith (1759/2002) considered concern for others to be fundamental to human character, empathy turns out to be highly influenced by one's upbringing. Parents and culture shape which moral emotions we dwell on and which morality we favor. Emphasizing anger, hate, fear, contempt leads to Bunker morality; emphasizing compassion, concern, love, forgiveness leads to Harmony morality.”

Comment
Darcia Navaez, PhD, has, in my view, a similar problem to that of Jim Taylor, PhD (Lost Legacy, 23 October): neither of whom is really up-to-speed on the works of Adam Smith, but by citing them in support of their otherwise most readable articles, I assume they felt that it would make their pieces publishable in Psychology Today, whose sub-editors would note that a well-known name makes their pieces reader-recognisable.

Smith did not believe that human characters or behaviours were, to quote a fashionable but incorrect metaphor, "hard wired", or 'inherent', or 'instinctive' (that was a view of Francis Hutcheson, Smith's Glasgow tutor). These behaviours and sentiments are learned and can vary widely according to upbringing and context.

Smith’s (and Hume’s) understanding of human nature – the sympathetic “concern for others” – was supported by a lengthy discussion in “Moral Sentiments” (1759) on how these “concerns” were generated, and they are not much different from Darcia’s elaboration of “Parents and culture shape which moral emotions we dwell on and which morality we favor”.

I refer readers to Moral Sentiments from which I could quote extensively from Smith’s early chapters, but feel on this occasion, his simple illustration is sufficient to make his point:

“Were it possible that a human creature could grow up to manhood in some solitary place, without any communication with his own species, he could no more think of his own character, of the propriety or demerit of his own sentiments and conduct, of the beauty or deformity of his own mind, than of the beauty or deformity of his own face. All these are objects which he cannot easily see, which naturally he does not look at, and with regard to which he is provided with no mirror which can present them to his view. Bring him into society, and he is immediately provided with the mirror which he wanted before. It is placed in the countenance and behaviour of those he lives with, which always mark when they enter into, and when they disapprove of his sentiments; and it is here that he first views the propriety and impropriety of his own passions, the beauty and deformity of his own mind. To a man who from his birth was a stranger to society, the objects of his passions, the external bodies which either pleased or hurt him, would occupy his whole attention. The passions themselves, the desires or aversions, the joys or sorrows, which those objects excited, though of all things the most immediately present to him, could scarce ever be the objects of his thoughts. The idea of them could never interest him so much as to call upon his attentive consideration. The consideration of his joy could in him excite no new joy, nor that of his sorrow any new sorrow, though the consideration of the causes of those passions might often excite both. Bring him into society, and all his own passions will immediately become the causes of new passions. He will observe that mankind approve of some of them, and are disgusted by others. He will be elevated in the one case, and cast down in the other; his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.” (TMS III.1.3: 110)

Smith discusses this process as dependent on contact with others, sequentially, first with parents (and other adults), then in the company of other children (school, playground, street games, etc., the great 'school of self-command'), through to entering adulthood.

How one treats others influences how they treat us; and from long sequences of complex interactions among humans in society, we are subsumed in the interdependent outcomes known as the ‘way we live’. He uses the metaphors of the “looking glass” and the “mirror” to emphasise the two-way nature of the what today we call the socialization of humans in society.

I recommend that readers either read Moral Sentiments directly or, for a short introduction to Smith’s moral philosophy, try my book, Chapter 2: “so weak and imperfect a creature as man”, pp 47-61, in Adam Smith: a moral philosopher and his political economy, 2008, Palgrave Macmillan.

When Wealth Isn't Wealth

Andy Absher writes in the Herald Bulletin online HERE

“Businesses compete because they must Discouraging risk-taking is a red herring”

“When you read Nancy Turner’s viewpoint, you would think the name of Adam Smith’s book was, “The Wealth of the Wealthy”. Though Smith makes many points, the point of competition isn’t so that the rich can get richer but so the common consumer can have the best price via market competition.”

Comment
Andy Absher makes this comment in the course of a local debate on Health Insurance, which is outside my remit on Lost Legacy (I only comment on political topics in the country where I vote – Scotland).

However, it is worth noting that Andy appears to confuse a different meaning of the word “wealth” with Adam Smith’s. Smith wrote Wealth Of Nations to clarify the real meaning of wealth from its confused meaning. That confusion remains active today.

The prevailing meaning of “wealth” in 18th-century Britain was that it manifested itself in gold and silver bullion (paper money in the form of promissory notes were of recent vintage – most people preferred their money in bullion form). A consequence of this version of money is that Sovereigns were supportive of policies that seemed to assure them of the greatest amount of gold and silver bullion accumulating in their treasuries year by year,

From this obsession they approved all kinds of policies that ensured they exported products abroad to earn more gold and silver than they had to send out of the country to pay foreigners for those products they imported. And they kept a tight reign on exports of gold and silver by means of protection (tariffs, prohibitions, monopolies of shipping and general hostilities towards other countries).

Adam Smith taught that the real wealth of a country was measured in the “annual output of the necessaries, conveniences, and amusements of life”, in short, what a country produced annually. Policies that led to more output were wealth creating; policies that restricted imports caused the purchase of expensive products that could be produced more cheaply at home, thus reducing the “annual output of the necessaries, conveniences, and amusements of life”, and made the country poorer as a result.

“The Wealth of the Wealthy” on this measure is meaningless. It smacks of a radical student’s slogan.

A Little Mystery To Be Solved

Ben Hyde writes in “Ascription is an Anathema to any Enthusiasm” Blog (HERE) in:

“The Perverse and Invisible Hand”

““I have recently started reading Albert Hirschman’s 1991 book “The Rhetoric of Reaction: Perversity, Futility, Jeopardy.” I’m only 20 pages into it so no telling where it’s going. But so far, it has totally blown me away. The book is an outline of three styles of rhetoric that are commonly used by reactionaries, i.e. those who would react against progress. These are generic arguments good in most any situation. Introducing free speech, extending the franchise, ramping up public education, rearranging the kitchen? You name it these rhetorical devices stand ready and willing.

He labels the first of these “perversity.” Here in while [sic] reactionary pretends supports the goal he then goes on to explain that efforts toward that end are certain to backfire. Efforts to improve health care? Such efforts will decrease health care! Universal schooling? Such efforts will lead to wide spread idiocy. Do-gooders make things worse. The audacity of this argument is breath taking. But look at the record! How that French Revolution turn out?

Hirschman points out that observers of the French Revolution quickly deployed this argument. Even before the it all went to hell in a hand basket. Edmund Burke in particular used this perverse argument, and later when it things got ugly he got a lot of credit for being so insightful. So did Burke invent this technique? Hirschman argues that no, Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand. This takes my breath away!

The invisible hand is a perverse argument. But in this case bad actions (individual greed, personal vices, and self interest) have the unintended consequence of creating a vibrant national economy. It’s as if God in his infinite wisdom had sus’d out how to turn his flock of sinners into something constructive. Smith might have given credit to divine providence but choose to give the credit to more amorphous but still spirtual invisible hand. Many of Smith’s readers saw right thru that. Particularly all those commercial actors looking to get the church off their case.”

Comment
I haven’t yet read Hirschman’s little volume, “The Rhetoric of Reaction: Perversity, Futility, Jeopardy”, (it’s now on order from Amazon for £13), so I cannot fully dissect what Ben Hyde is asserting.

He seems to be reporting that “Burke was mimicking newly popular argument with a similar structure that had recently arisen in the circles he ran in. I.e. the hypothesis of Adam Smith. Aka, the Invisible Hand.”

I find this intriguing to say the least. Had the “invisible hand” argument really “recently” arose “in the circles he [Burke] ran in”? If so, this is a discovery of momentous importance in the history of economic thought! More to the point: how did I miss it?

Or is it an idea of Hirschman’s that Burke used a rhetorical device to make his case against the French Revolution that was similar in construction to that device which Adam Smith used in the case of “an invisible hand”, with a side assumption on the part of Hirschman that Burke ‘ran in” the “circles” where they discussed Adam Smith’s metaphor of “an invisible hand”?

For this to be true, Hirschman must either have documentary evidence that Smith’s metaphor was widely discussed in the late 18th century (for which I have not found any trace so far) or he must assume that it should have been widely circulated because the metaphor was widely discussed in the late 20th century! Either basis for Hirschman’s argument is in itself a preposterous proposition.

Or, lastly, is it something that Ben Hyde drew from his reading of the first 20 pages of Hirschman’s book? Until I receive the book I cannot comment or sort out who was the author of what part of Ben’s post.

October Lost Legacy Prize Won by Kieran O'Hara - also a nominee for the 2009 Annual Prize

Kieron O'Hara, UK Centre for Policy Studies writes (25th October) in Gov Monitor HERE:

“Capitalism And The Decline In Trust Of Our Markets”

“Smith has not been well-served by commentators whether admiring or hostile. He was neither the apostle of ‘greed is good’, nor the evangelist of free markets as the ideal resource allocation mechanisms at all times. In fact, his careful and lengthy examinations of human motivation, The Theory of Moral Sentiments and The Wealth of Nations still contain important lessons for our time.

It is particularly interesting that free market economics is widely blamed for the decline of trust throughout society, because rereading Smith reminds us how once upon a time the spread of markets was thought beneficial because it helped spread trust.

Our understanding of markets has fragmented since the days of Smith. Economists see them as mechanisms for optimally allocating resources, while sociologists see them completely differently as exchange mechanisms that tend to overwhelm other types of connection that hold societies together. … But Smith himself saw them as both social and economic. Their two different aspects could not be separated out.

Participation in markets helped people internalise the norms of socially-beneficial behaviour, spreading habits of trust and trustworthiness. They used pre-existing trust mechanisms, such as respect for contracts, the rule of law, sound money and a work ethic, and brought them all together in a perfect storm, magnifying their individual effects and transmitting trustworthy behaviour, self-discipline, moderation and stability across society.

Smith denied that markets could rest on selfishness (as many on the left maintain they do). Markets do indeed rest on self-interest, but that is not the same as selfishness. My self-interest is not simply the sum of my preferences at the moment (as many on the right will say it is). I am not the sole determinant of my self-interest; society makes a contribution too.

Whichever is the case (and they are not mutually exclusive), the knee-jerk reaction to blame market economics for the increase in individualism and the decline in trust is mistaken. Instead, following Smith, we should deduce that markets function less well, and are treated with more suspicion by consumers, when trust has declined for independent reasons."

Comment
Without doubt Kieron O'Hara deserves the October 09 Lost Legacy Prize for the best article on the Internet on Adam Smith (I would put it in for the best article on Smith in the year, but we must wait and see over November–December).

I am not prepared to risk overstepping the copyright conventions by publishing the whole article (though “it is better to ask for forgiveness than for permission”, as the Jesuits used to say).

The article is "COPYRIGHT © 2002 - 2009 Policy Dialogue Media Group International, INC. All rights reserved."

It can be read in full
HERE:

I strongly recommend that your follow the link and read Kieran’s full argument (and pass the news on to your readers and Twitter sites. It is astonishingly brilliant compared to the normal daily dross put out in the media, including by top economists.

Congratulations to Kieron O’Hara for showing his understanding of Adam Smith, and to Gov Monitor for publishing it.

Excellent Writing But Still Mythical

Atanu Dey writes a highly readable and lively piece on “Why education matters” HERE

“I am sure that there is no secret cabal of powerful people with evil glints in their eyes plotting to keep Indians illiterate. But individual behavior motivated by private incentives - micro behavior - have consequences at the social level - macro outcomes - that are not intended by individuals. The most famous example of this is Adam Smith's "invisible hand" - the market mechanism that grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare. So also, there could be what we can call the "invisible fist" of the government which can pummel the life out of a society even though no single government official is doing anything more than making his or her life comfortable.”

Comment
Atanu Dey writes well and complains that 33 per cent of Indian adults are illiterate. An alarming statistic for any country and doubly so for the world’s largest democracy.

His clever construction of the possible reason why government action fails to address the illiteracy problem by drawing a parallel with the invented notion of an “invisible hand” in the economy, wrongly attributed to Adam Smith by modern economists is well stated. But good writing is still vulnerable to the evidence.

Because Adam Smith didn’t write anything about the “invisible hand” being a “market mechanism” that “grinds out the socially beneficial outcome even though an individual is only interested in his or her own welfare” - see numerous posts in Lost Legacy that expose this myth – it was at root a myth created by well-meaning modern economists as part of anti-Soviet planning propaganda during the Cold War (and over enthusiastic mathematicians carried away with their 'proof' of general equilibrium applying to the real world).

Their motives were laudable – Stalin’s Soviet planning was backed by repressive civil violence and threatened to cause World War III (and IV and V, etc.,). But by their apparent endorsement of unrestrained behaviours their own unintended consequences created a mythical monster that self-interest, elided by epigones in selfishness, worked out, Panglossian-like, for the “best of all possible worlds”, covering over a plethora of externalities that damaged the interests of the rest of society (pollution, environmental destruction, monopoly pricing, protectionism, and local wars arising from them.

By associating Adam Smith with the invented myths, they traduced his reputation too. Most economists actually believe that Smith was the author of the myth. He wasn’t.

Yet many climb on the bandwagon that the current recession ‘exposes’ the ‘failures’ of following Adam Smith’s policies, in particular ‘laissez-faire’ (which he never supported – nor mentioned even once), ‘lack of regulation’ (when in fact he specifically advocated the exact opposite where it came to bank policies “which might endanger the whole security of the society”; see WN II.ii.94: 324) and the mythical “invisible hand”, mere metaphor for an entirely different set of circumstances).

Tenuous Links Do Not a Theory Make

Bill Bonner writes in Running Because I Cant Fly Blog HERE:

"Macro for Dummies"

“Later, economists of the Scottish enlightenment, notably Adam Smith and Adam Ferguson elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a ‘spontaneous order,’ which were the “result of human action, but not the execution of any human design”.

Comment
Adam Smith wrote nothing to suggest he saw the economy “ordered by the invisible hand of God”. Adam Ferguson, a former Chaplain to the famous Scottish Regiment of the Black Watch, may well have harboured such ideas, but Adam Smith didn’t reveal such beliefs, if he held them.

The meaning of the words, “result of human action, but not the execution of any human design”, does not necessarily imply that if it was not the result of “human design” it must have been designed by God; it could as well be the that their “design” was not necessary – it was not “designed” by anybody, or anything, but was the result of unintentional activities, some of which had unforeseen consequences.

Evolution of species shows that few, if any, life forms remained exactly the same from their predecessors over geological time; they change as their environments change, some became extinct, others change their forms, even dramatically from sea- to land animals, and a few changed from quadrupeds to bipeds, as the evolution of humans from Hominines show.

On Adam Smith’s alleged “invisible hand of God” theory, his religious beliefs did change from being a candidate for ordainment as a minister in the Episcopal Church of Scotland up to 1744 (at Oxford, aged 21) to a secular career as a moral philosopher.

I discuss this in my paper, “The Hidden Adam Smith in his Theology”, presented to the History of Economics Society, University of Colorado, Denver, June 2009 (available on request).

A Claim Too Far

Terry Arthur posts on the Adam Smith Institute Blog HERE:

The “invisible hand”, in its modern guise, has been given many invented roles by modern economists since the 1950s, all wrongly attributed to Adam Smith’s single use of the popular, 18th-century metaphor in Book IV of Wealth Of Nations.

For example, it’s been credited wrongly with meaning market forces, supply and demand, the price mechanism, market co-ordination, balancing economies, and ensuring that self-interested actions always result in public benefits.

Terry Arthur takes these exaggerations to new heights:

“It is the result of Adam Smith’s "invisible hand" – the most powerful information system the world has ever seen – bar none...”.

In Smith’s use he explains why some, but clearly not all (British foreign trade was a high proportion of its 18th century annual economy), merchants, from a “concern for their own security’, preferred to avoid the higher risks of foreign trade by investing locally, which, by the arithmetical rule that the whole is the sum of its parts, increased domestic output and employment.

It had nothing to do with Smith’s writing on the above subjects, all covered in Books I and II of Wealth Of Nations without any mention of “an invisible hand”.

Should Terry Arthur wish to source his notion of Adam Smith’s original use of the “invisible hand” he would search “vainly for support of [his] notions” in Wealth Of Nations.

In books I and II, Smith discusses market forces and the coordination role of prices, without mention of an “invisible hand”, and in Book IV, where he mentions (once) “an invisible hand”, he does not discuss market forces or the coordination role of prices.

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

A Psychologist Invites Modern Economists to His Couch

Jim Taylor, Ph.D. writes in Psychology Today HERE:

“Economics: Economists are Irrational!”

What are free-market economists thinking?

“I recently read an article by the Nobel Prize-winning economist Paul Krugman in which he described the renewed battle between so-called freshwater economists (so named because they are largely based at the University of Chicago and other Midwestern universities) and saltwater economists (based primarily at Princeton, MIT, Berkeley and other coastal universities). The freshwater economists are disciples of Adam Smith and espouse the free-market and rational actor models. The saltwater economists align with John Maynard Keynes and his belief in the need for regulation in financial markets and that people aren't rational actors.
The past 50 years have been dominated by freshwater economists who had a reverential faith in the power of free markets (Smith's "invisible hand") and the rationality of people in their financial decisions. Given what has happened to our economy in the last decade, noted for its multiple bubbles (e.g., Internet, housing, mortgage), it's hard to believe that any of these "efficient market" adherents still have jobs, much less credibility in how the economy actually works.”

Comment
You should read Jim Taylor’s article. It’s a great knock-about piece of popular journalism, much of which I enjoyed, some of which I thought not quite fair in its populism, and on occasion some elements of which he is wrong. This last is not Jim’s fault: he takes the claims of modern economists at face value and responds to them to his light-hearted rant.

Lost Legacy has never been slow in criticizing the ‘Chicago Adam Smith’, a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723.

George Stigler’s boast that “Adam Smith is alive and well and lives in Chicago” (1976) reflects to invention of the Adam Smith of the “invisible hand” (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants – foreign trade with Europe, India, and the North American colonies, was a major contributor to the British economy – who preferred the home trade), and had nothing to do, at least in Adam Smith’s mind, with how markets worked, how banks should be regulated (yes, he favoured government regulations in banking!: WN II.ii.94: 324), or how the price system worked.

The belief that the “invisible hand” was a significant ‘idea’, ‘concept’, ‘theory’, or ‘paradigm’ was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics (which interestingly did not include a term for the “hand”) and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations.

However, Adam Smith did not espouse a vision of ‘perfect competition’, of ‘Homo economicus’, or ‘rational actor models’. On this assertion Jim betrays a lack of appreciation of Adam Smith’s works.

Even when discussing price changes in a market, he spoke of ‘neighbourhood’ markets, not an economy (Book I, Wealth Of Nations). I don’t expect Jim to be familiar with the Kirkcaldy Adam Smith, or with economics generally (his three degrees are in psychology), but he might appreciate a glance through Lost Legacy to see how much he traduces Smith’s reputation by making light of the differences between what he as responsible for (“Theory Of Moral Sentiments”, 1759 and “Wealth Of Nations”, 1776) and what modern epigones invented in his name.

Jim says he “would love to put these economists on the couch and explore what is going on in their heads” (I assume no Freudian motives here!); I would rather that Jim sat in a library and read some Smith and Keynes for himself. As it is, he gives offence to the valid notion that inter-disciplinary familiarity is good for scholarship.

Jim and I can agree that modern “economists” who dominate the profession presently, invented a mathematical world devoid of human beings. Adam Smith, incidentally, a talented mathematical scholar by 18th century standards, is totally innocent of such a charge. Those ‘guilty’ as charged can defend themselves and Jim should direct his ire, undergraduate humour, and psychological "explorations of their heads" to them.

An Unbridled Error

Stephen Fleischman, writer-producer-director of documentaries (see www.amahchewahwah.com, e-mail stevefl@ca.rr.com), writes in the
The Smirking Chimp HERE:

“Hypocrisy Unbridled”

“Going back to Adam Smith, the concept that the "invisible hand" of the free market would keep the capitalist economy in balance has been the conventional wisdom. Capitalism must grow or die. And grow it did. Mergers and acquisitions became the modus operandi as corporate enterprises struggled with their competitors to survive.”

Comment
Stephen Fleischman writes a racy and articulate polemic against the “hypocrisy” of certain ideas about capitalism, as taught him from his long experience in tv news media.

Yes, the “conventional wisdom” may very well be as stated above, but this view has nothing to do with anything Adam Smith wrote. The “conventional belief” was an invented myth by certain economists in the 1950s. Indeed, it is a distortion of the significance of Adam Smith’s single reference to “an invisible hand” in Book IV of his Wealth Of Nations which also discusses markets in Books I and II, without mentioning “an invisible hand”.

This is more than an academic quibble. If you believe that markets are kept in “balance” (whatever that means!) by such an entity then you are in severe danger of complacency when events show that markets are out of “balance”.

Recent events have shown how fragile such beliefs attributed to Adam Smith are with leading personages, such as Alan Greenspan, who included in his very public “mea culpa” a renunciation of his belief in the “invisible hand”, as if Adam Smith had somehow let him down and was responsible for his own self-deception, courtesy, it may be said, of listening too much to Ayn Rand.

An Infamous Misquote

“Hank” writes in Own The Dollar (“Don’t Let the Dollar Own You”) HERE:

“Famous Quotes About Money And Investing From Adam Smith The Father of Capitalism » Stock Quotes Online”

“Who Is Adam Smith? Adam Smith wrote “The Wealth of Nations” which is considered the first modern work of economic theory. The Wealth of Nations discussed that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods needed by society by a so-called “invisible hand”. The invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is created by the combination of our economy’s self-interest, competition, and supply and demand forces, and is capable of allocating resources in society. Adam Smith is widely cited as the father of modern economics and capitalism.”

Comment
Hank writes an "infamous summary" of Adam Smith’s “quotes”

Yes, “the invisible hand” is a “term” used by many modern economists to “describe” the underlined sentence above, but it was never used by Adam Smith to do so.

It is a complete myth that Smith used the metaphor of “an invisible hand” in this manner. He used the metaphor only once in Book IV of Wealth Of Nations and not in a description of “self-regulating markets” , “competition” or “supply and demand forces”, all of which he discussed in Books I and II of his Wealth Of Nations but without mentioning "an invisible hand".

This fact is checkable by those economists who purvey the myth of Smith’s use of the “invisible hand”, should they ever bother to read Wealth Of Nations.

Whether Smith was the founder of “modern economics”, as taught today, is doubtful; even more doubtful, is the proposition that Smith founded “capitalism”, a 19th-century phenomenon and a word first used in English in 1854 (Oxford English Dictionary) by the novelist William M. Thackeray, in his book “The Newcomes” (Smith died in 1790).

“Hank” has some explaining to do. Merely repeating what his tutors told him, or his textbooks claimed, is no substitute for showing exactly where Adam Smith wrote that the “invisible hand” produced “the right amount and variety of goods needed by society”.

Long Post - Magna Carta's Significance

Bruce has posted the following on his Blog (HERE)and I have commented below too.

Bruce's Post:

"Magna Carta: What it is and what it isn't"

I would think most educated people in the Anglo-American tradition and in those countries who either had English Common Law imposed or adopted as the basis of their own national law have heard of the Magna Carta and understand that it is in some sense the fountainhead of that law. But to a large degree this is a misconception of its nature and purpose, it is not a grant of privileges from the King to his subjects, instead it is if anything a confession by King John in 1215 that he has overstepped what later became known as the Ancient Constitution. Britain did not and still does not have a written Constitution, instead its fundamental laws and institutions were considered at least through the nineteenth century to have been transmitted literally from time immemorial, that is in time prior to memory. And this is to my knowledge typical of all ancient European law and perhaps all Indo-European law (people with knowledge of Vedic Indo-Iranian law please jump in) and maybe all law, rather than looking back at some indefinite point where people entered into a Social Contract there seems to be a sense that Law precedes society altogether. A concept that may be echoed (or not, you tell me) in John 1:1 "In the beginning was the Word, and the Word was with God, and the Word was God."

Now certainly there were attempts at compiling and codifying the law, notably associated with the names of King Alfred the Great and Edward the Confessor, but the common view before Maitland was that the law itself was pre-existent. (A recent book that I confess I have yet to read but by the very thorough historian Patrick Wormald is Making of English Law: King Alfred to the 12th century). This was not the exclusive view, some maintained that the Common Law came over from Normandy with the Conquest in 1066, but generally the idea that King Alfred and then Edward the Confessor were law compilers and not law makers won out. (Though Alfred seems to have a more expansive view of his powers in this regard.)

What does any of this have to do with the Magna Carta? And what is so important about the Magna Carta to start with? I mean this is an economics blog! Well I am not sure, I am kind of making it up as I go along, those who want to follow and correct this line of thought can follow along.

A translation of the Magna Carta can be found at Constitution.org http://www.constitution.org/eng/magnacar.htm where it is after the Athenian Constitution held as the second oldest foundational documents for our own Constitution. Yet in reading the Magna Carta it is with a few partial exceptions not foundational at all, instead it is a restoration of the Ancient Law to the time before innovations by King John, his brother Richard the Lion-Hearted and their father Henry II. Now there are two provisions which are foundational if not actually considered original to the Magna Carta.
14. And for obtaining the common counsel of the kingdom anent the assessing of an aid (except in the three cases aforesaid) or of a scutage, we will cause to be summoned the archbishops, bishops, abbots, earls, and greater barons, severally by our letters; and we will moveover cause to be summoned generally, through our sheriffs and bailiffs, and others who hold of us in chief, for a fixed date, namely, after the expiry of at least forty days, and at a fixed place; and in all letters of such summons we will specify the reason of the summons. And when the summons has thus been made, the business shall proceed on the day appointed, according to the counsel of such as are present, although not all who were summoned have come. & 63. Wherefore we will and firmly order that the English Church be free, and that the men in our kingdom have and hold all the aforesaid liberties, rights, and concessions, well and peaceably, freely and quietly, fully and wholly, for themselves and their heirs, of us and our heirs, in all respects and in all places forever, as is aforesaid. An oath, moreover, has been taken, as well on our part as on the art of the barons, that all these conditions aforesaid shall be kept in good faith and without evil intent.
Thus Ch. 14 lays down the principle of 'no taxation without representation' while Ch. 63 affirms the pre-existing rights of all Englishmen. But note that these two do not precisely map, you will look in vain for the concept of 'democracy' tout court in the Magna Carta, there is no hint that the Parliament promised in ch. 14 includes FULL representation of the people.

Instead if you read through the Great Charter, the Magna Carta, you will see that it is primarily a reassertion of the King's Tenants in Chief's (those who held their land directly from the King) property rights against the King rights with only some secondary protections for sub-tenants and freemen.

But words and concepts you will not find in the Magna Carta: Equality and Democracy. Instead it is a fairly straightforward defense of the principle that Liberty=Freedom from coercion from above over property, where property includes ones own person. This is not to concede that the concepts of equality and democracy are not inherent in English and hence American society all along, just to recognize that it would be a long time before those were recognized in law.
Posted by Bruce Webb at 12:53 PM


My Comments:
Gavin Kennedy said...

Hi Bruce

Your interpretation of Magna Carta's significance is quite accurate in parts and contains much of my stated views abotu its significance
.
However, you raise issues I do not raise, specifically that Magna Carta was not about 'democracy' (a not well-known idea before the late 18th century) nor about the 'liberty of the common people'.

Long before governance by 'feudal' law, there was a long period from the fall of Rome (5th century), across Europe, known since as 'Alodial' rule, where the 'barbarians', so called, invaded the former Roman provinces and seized land that was held on the basis of who was strong enough to hold it.

With the coming feudal tenancy, the strongest war lords or 'kings' gave title to those war lords who recgonised the King as the sole dispenser of land, and title, to whomsoever he pleased to do so in exchange for military obligations of loyalty and recognition to the King AND his heirs.

From this, Kings tended to assumre absolute powers and to become 'oppressive' and arbitrary in their judgements, offending traditional rules and behaviours (e.g., King John).

The significance of Magna Carta was its bringing under scrutiny the arbitrary powers of Kings. They had obligations to consult their near equals, the Barons, not the people! This was a power-sharing charter, albeit limited in scope.

Popular liberty (the peasants remained, in effect, 'slaves' with no rights) is at this stage about curbing absolute powers, and had nothing to with 'democracy', and little to do with popular 'equality'.

Judge its politics, not against modern connotations that followed six or more centuries later. Laws were not created by single individuals; they took centuries to become formalised.

You seem to be close to seeing this in some paragraphs, but then slip into stubborn focus on modern ideas that came much later.

History took longer, as the debate over the US Constitution showed, before and after the Declaration of Independence and the adoption of its Constitution.

Gavin

Announcement

Somebody sent two comments for Lost Legacy today and I passed them for publication but they seem to have 'disappeared'!

I did not make a note of them but they referred to their enjoyment of Lost Legacy (thank you very much) and commented on somebody whose ideas were the subject of my posting.

Could the person concerned kindly report his/her message, please.

Thank you

Gavin

Another Great Smithian Metaphor

Peter Boettke writes in The Austrian Economists (HERE):

“Is Adam Smith's discussion of governmental "juggling trick" relevant to our policy discourse today?

Scott has already talked about this at The Economic Way of Thinking, but we should dig a bit deeper into the discussion from Smith's Wealth of Nations, Vol. 2, pp. 929-230. Smith argues in those pages that: (1) when the public debt reaches a certain level, the fiscal system is threatend, but there is not a single instance where a government has paid off the debt fairly and completely; (2) rather than pay down the debt with increased taxes, government's choose "pretended payment"; (3) the prefered method of pretend payment is repudiation through debasement of the currency; (4) this method extends the 'calamity to a great number of other innocent people'; and (5) rather than do the right thing -- which would be least dishonorable to the debtor, and least hurtful to the creditor -- government instead choses to engage in "juggling trick".

Comment
This is a case of the appropriate use of a quotation from Adam Smith’s Wealth Of Nations because it is still relevant, as government debt has increased significantly since the 18th century – in those days debt was raised mainly to fund wars or bribe foreign powers – whereas nowadays government debts fund just about anything that modern, BIG, governments spend taxpayers’ and lenders’ money upon.

Smith wrote while governments were happily inventing new forms of raising revenue for governments from the private economy. ‘Sinking Funds’ to pay-off debt soon became sources of new funds to spend more money, not always, if ever, wisely. Then they added, on a ‘temporary’ basis, income tax , and so it has gone on and on. Today, in Britain’s case, we have ‘stealth taxes’ and ‘quantitative easing’ (printing money), and unheard of levels of debt.

Smith observed that governments managed to avoid paying back all of their debt through various “juggling tricks” (beware: another one of Smith’s metaphors!).

Congratulations to Peter Boettke for picking upon Scott's (HERE) references to government debt and 'juggling tricks'.

I recommend that you follow the links.

Where a Little Knowledge can be Misleading

Paul F. Hosman resides in Kalamazoo and writes for “Read & React” in the Kalamazoo Gazzete ("A blog to create conversation between the Kalamazoo Gazette and its readers) (HERE):

“Intelligence, beauty and skill favor select segments of society over the welfare of all people”

“Maybe we as a nation need to accept the proven fact that Adam Smith was wrong when he stated that the optimum in society occurs when everybody works in their own best interests, and accept John Nash’s Nobel prize winning dissertation in economics that states that society works best when we work in our own best interests and in the best interests of society as a whole.”

Comment
The trouble is for this argument, Adam Smith did not say everybody should work (with whom?) in ‘their own best interest’. That is a crude, narrow and incorrect representation of his philosophy (and economics).

Nor did John Nash state that “an economy works best when we work in our own best interests and in the interests of society as a whole”. That is a crude, partial, and misleading statement of his work.

Where did Paul F. Hosman, residing in Kalamazoo (I remember the song), get his ideas about Smith and Nash from? Could it be the Hollywood film, “A Beautiful Mind”?

From the rest of his post he seems to be hooked up on a crude DNA theory that some are rich and some are poor because of their inherited DNA profile giving them, or not, as the case may be, “Intelligence, beauty and skill”.

I take it from this “evidence” that Paul has read bits on Adam Smith and John Nash, though not enough to understand either author’s ideas - Moral Philosophy in the case of Smith; mathematical modeling (Prisoner’s Dilemma) in the case of Nash, plus, perhaps a magazine article or two on genetics, DNA and the inheritance of characteristics.

Arguments prefaced with a need to accept “the proven fact” about something, of which I am familiar (Smith and Nash) and which is also not a “fact” and certainly not “proven”, but manifestly wrong are reminiscent of “dinner party” debates and a few “bar room” arguments (the latter in days when I drank alcohol).

Since my younger days, I have learnt to pass over such “arguments” to save embarrassing the host and the speaker, and to calm my blood pressure.

From a Multitude of Epigones

Tom Slater writes (19 October) in GreenBeat (HERE)

“Cap and Trade 101: For those who haven’t been following for the last 30 years”

“This approach to regulation applies ye olde economist Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially) to curtail pollution with less human intervention and at a lower cost. As is, California spends close to $500 billion annually regulating businesses’ emissions. The U.S. is trying to avoid this on a national level. But the idea of cap-and-trade can’t be traced all the way back to Smith. Instead, it began with a 1960s-era supercomputer.”

Comment
“Adam Smith’s theory of the “invisible hand” (the power of the free market, essentially)” compromises the rest of Tom Slater’s interesting article.

I am less concerned with the errors in Tom’s attribution to Adam Smith of the myths about the metaphor of the “invisible hand” than I am with the effect of the continual repetition of the attributed myth in all sorts of contexts.

The real culprits for the myth are those modern economists (from the 1950s onwards) who grabbed it from “ye olde economist” and applied it to their theories of general equilibrium in solving a problem – is a market equilibrium theoretically possible? – or who adopted it to give an unnecessary mystical credence to the manifest superiority of markets, under liberty and the rule of law, over the then competing claims of Soviet planned economies and the visibly repressive political structures associated with their operation.

The intentions were perfectly honourable and, I believe acceptable, but markets are well understood and do not need ‘miracles’ of mystical “invisible hands”, which nobody has ever explained how these “invisible hands” work, and often attribute different meanings to them – some say variously that the invisible hand is (a small selection from a larger list):

“supply and demand”,
“the power of free markets”,
“coordination out of autonomous decisions”,
a “theorem at the root of economic liberalism”,
“market competition”,
“the market process at work”,
“market forces”,
“self-interest”,
“competition”,
“consumer satisfaction”,
“maximised profit”,
“free competition”,
“foundation of modern welfare economics”,
“the price system”
“great idea of intellectual history”,
“the purchases or sales of goods or services for money”
“ a force inherent to the market”
“inevitably pilots the economy”

There are honourable doubters too, who assert that the metaphor has been misused by economists, though they are fewer in number than those who have bought into the myth.

Recently, of course, several new voices of dissent emerged in response to the current financial crisis, allegedly caused by adhering to the myth of the invisible hand as a perfectly natural corrector of market variations.

Already, as financial institutions steady their balance sheets, some of these recent “converts” are retracing their steps back to the myth, under the familiar truth that “the markets are self-correcting”.

Markets are strong enough to ‘self-correct’ but that has always been true, without any recourse to “invisible” body parts. It’s not the undoubted resilience of markets that is in dispute; it’s whether the invisible appendage ought to be invoked and attributed to the wholly innocent Adam Smith by a profession that claims to be a harder science than theology.

From the Invention of Property (collective and individual) All Else Followed

Readers will recall that I had an exchange with Bruce on Bruce Web last week (HERE): Here

This is my initial response to where we diverge - the historial significance of the invention of property - if we cannot agree on that issue, I do not see how we might agree on the rest,

Hi Bruce

We appear to be marching in diverging directions, possibly reflecting a difference in our understanding of the pre-history, and more recent history, of humanity. I take the long view; you appear to hold to a shorter horizon; I try to be disengaged, preferring to understand rather than take sides; you are influenced by E. P. Thompson’s history of the English working class, a much more immediate scholarship of a narrower slice of human history, from a particular perspective.

We do not see eye-to-eye on the most important role of the evolution of human property. Apart from the period when the entire human species, dispersed across the landmass and ignorant of each other more than a few hundred miles away in any direction, subsisted from the limited bounties of nature, the late pre-history and history of the human race began, in effect, with the discovery of the novel role of new forms of subsistence encompassed in Herding (possibly 20,000 years ago after the Ice-age, and Farming, sometime around 11,000 years ago in the plains of Eurasia and the ‘fertile crescent, centred on the Middle-East.

Most human groups outside these areas remained based on the hunter-gatherer economies, where the sole form of property was group, later tribal, territory (‘our territory, not theirs’), a notion ‘known’ (because practiced) to primate cousins and to predator animals. The subsistence economies known to Hominids (Homines) or proto-humans species, also evolved stone-technologies (the stone ages) and laid claim to territories by virtue of their ‘occupation’, and abandoned or lost them in the face of violent challenges from other groups.

This subsistence culture was stable overall and almost unchanging – some stone-tool cultures didn’t change their technologies for over a million years - even as Hominid species became extinct. With the greater intelligence of Homo sapiens, from 200,000 years ago, primitive technologies evolved in some areas of the earth, though not in others, as early explorers found from the 16th-18th centuries. Tiny groups survived as hunter-gatherers, with relatively sophisticated cultures, into the 20th-century.
We can debate why some human groups developed notions of property and others didn’t; it had nothing to do with called ‘superiority’ and a lot to do with circumstances. Among the latter was the discovery of “herding” and “domestication” of animals, and later of plant foods, at the end of the last-ice age. We can trace the effects on the human populations. Briefly, population levels reflect the subsistence base (as throughout nature in all species). For populations to grow, gross annual output of subsistence has to rise, and as it rises, new or more intensive subsistence exploitation has to grow as well. Additionally, institutional development promoted by the subsistence technologies has to succeed in transmitting to following generations the necessary disciplines.

It is my contention, following Adam Smith (and others), that one institutional innovation was what we call property, collective and personal. No human groups, so far known, achieved the necessary subsistence growth without the innovation of property. Taking the ‘bigger picture’ across the earth, those groups that relied solely on the forest, rivers and sea shores were bound by the limits imposed by the free bounties of nature. Those groups that discovered appropriate technologies, including property (in herds of animals and specialized in farming), grew in overall sustainable population levels and the necessary higher output of annual subsistence.

Collective property has always existed alongside notions of private property. The former is vaguer and universal; the latter is specific and local. Humans have always lived in social groupings (like our primate cousins), not least for protection from predators and from rival groups. Success in subsistence growth both strengthens group bonds and attracts the attention of rival groups. Issues of inheritance, peace and war, inter-group bonding (women) and alliances, begin to form and eventually take their shape in relationships within and without the group.
Herds wander; they also attract outsiders. Crops are vulnerable to wandering animals and to intrusive herds. Fences, natural and man-made, give form to the institution of property. The fable of Cain and Able in Genesis illustrates the potential of property rights to lead to violence. Tribal and family wanderings across vast stretches of territory is incompatible with farming seasons, which promote settlements close to farmed land.

Jared Diamond writes eloquently about this being humanity’s greatest ‘mistake’, but what was once done cannot be undone (to return to the subsistence of population levels comparable with 11,000 years ago means the elimination of c.6 billion people). The hunter-gatherer cannot last without regular subsistence, the level of which is limited by the available bounty of nature; and neither can the farmer, but if farmers can solve the problem of inter-seasonal gaps in subsistence (storage, foraging, very large herds, and the domestication of the horse), and their new forms of subsistence can produce annually sufficient for per capita consumption, the basis is laid for a survival strategy.

Two things are clear. First, the subsistence problem was ‘solved’ eventually – growing populations at steady, low, levels of per capital consumption – and, Second, the inevitable consequence of growing inequality from growing total subsistence levels, was a siphoning off of a proportion of the annual output for the disposal of whichever sub-group took control of the group, and claimed and held control of its property.

Throughout history right up to the end of the 18th century in parts of Europe, per capita consumption was steady, but total output was slowly rising. From the decades around 1800 onwards, per capita income began and continued to grow without precedent, as did total GDP. Whereas earlier elites diverted much of the economy’s growing surplus into stone-built early examples of ‘civilizations’, the detritus of which can be found in Mediterranean countries, Egypt, Babylon, all across Europe, India and China, parts of Central America and South-east Asia, to show the scale of what became available, net of the huge amounts lost in wars, and reached levels hitherto unknown to humanity. And population numbers grew accordingly.

None of this would have happened without the invention of property. Nothing is implied here about whether people were ‘happier’, better off, ‘properly or fairly treated’, by those who ruled over them. Adam Smith (and many others) took the view that human nature is unchanging. Material change does not necessarily make for more worthy people. The task of the philosopher is to observe, not to take sides; is to learn from history, not to export current ideas to previous generations; and to make modest suggestions (they are the only ones likely to be adopted) for improvements that accord with how humans behave.

The “Man of system,” warned Smith, “is apt to be very wise in his own conceit”, and seems to imagine “that he can arrange the different members of a great society with as much ease as the hand can arrange the different pieces upon a chess board”, but “every single piece has a principle of motion of its own, altogether different from that which the legislator might chuse to impress upon it” (Moral Sentiments VI.ii.2.17: 233-34).

[Follow Link: http://bruceweb.blogspot.com/]

Another Myth Circulates

Subir Gokarn (19 October) in Business Standard HERE http://www.business-standard.com/india/news/subir-gokarnvalueorganisation/373592/
writes on Oliver Williamson's work and its “great relevance for many contemporary Indian issues”

“Adam Smith is best known for his characterisation of the market economy as an “invisible hand”. Buyers and sellers, each acting in their own interest, lead to a collectively superior outcome in terms of the efficiency of resource utilisation. The efficiency gains that the invisible hand generated were a primary contributor to the “wealth of nations”.

Comment
Adam Smith never “characterised” the market economy as “an invisible hand”. Yes, many modern economists have so-characterised Smith in such an attribution, but there is no documentary evidence that he did so.

The documentary evidence of the only three times that he used the invisible hand (in his posthumous Essay On Astronomy, 1795; Theory Of Moral Sentiments, 1759; Wealth of Nations, 1776) shows clearly that he was not referring to the market economy at all.

The first time (History Of Astronomy, 1744-58) refers to the invisible hand of Jupiter, a Roman god, no mention of a market economy; the second time, Moral Sentiments (1759), refers to a rich landlord feeding the “many thousands” he employed from the produce they supplied each harvest (no mention of a markets economy), and the third time, Wealth Of Nations (1776), refers to some, but not all merchants investing their capital locally rather than abroad (no mention of a market economy).

Smith discusses the working of markets in Books I and II of Wealth Of Nations and does not mention “an invisible hand” at all. I would regard this as conclusive: when he does mention the metaphor as an “invisible hand” he does not mention “market economies” and when he mentions market economies, he does not mention an “invisible hand”.

On this basis why is “Adam Smith … best known for his characterisation of the market economy as an “invisible hand”?

The explanation can only be that the belief is a myth, created by modern economists who believed what they were told by their tutors or read in their modern textbooks. None of them, apparently, checked with Adam Smith’s published works. Most still insist, however, in believing the characterisation to be true despite the facts being drawn to their attention.

See my articles on “Adam Smith and the Invisible Hand: from metaphor to myth” HERE; the response by Daniel Klein (HERE) and my reply to Daniel Kelin HERE.

Smith on Government Roles

Attorney Jonathan Emord writes(19 October) in News With Views HERE:

“OVERNIGHT SOLUTION TO THE NATION'S ECONOMIC WOES”

“There is an alternative to this highly paternalistic and historically failed approach to problem solving. It is the alternative view, understood to be a moral imperative by the primary author of it, that Scottish philosopher Adam Smith in his rebuttal to mercantilism, The Wealth of Nations. To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest. In short, self interest in the market causes those who would profit to find ingenious means to improve the human condition, for which others are willing to pay. For the benefit arising from invention, the inventor is given a just reward, profit. If the inventor is allowed to keep the lion’s share of that profit, he or she will have an incentive to invent yet again, and, if he or she guesses correctly, will hit upon yet another item that best suits the needs of consumers, lifting their standard of living in the process.

Rather than place faith in the market which has proven its profound power to transform and uplift, the present administration places boundless faith in government. Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs. As government has grown exponentially, it has proven itself in every nation incapable of solving the vast majority of the human problems that its political rulers expropriate private funds to solve.”

Comment
The sentiments, broadly speaking, expressed by Jonathan Emord should appeal to many people needing a headline slogan approach rather than a detailed policy, because the stuff of practical politics is much more complex when the details are examined for selection prior to implementation.

Emord’s theme is an “overnight solution”, typical of a lawyer’s thinking – review the facts, come to a verdict, pronounce it, and then leave other people to run with its consequences. And his “overnight solution” would certainly have consequences.

I am not sure that his star witness, Adam Smith, offered quite the passive advice attributed to him by Emord:

“To paraphrase Smith, it is not by the benevolence of the butcher or the baker by which we obtain our meat and bread but by the pursuit of their own self interest.”

What happened to the “brewer”, as in “the butcher, the brewer, and the baker”, all three apparently necessary for an 18th century “dinner” (WN I.ii.2: 27)? (I note that it is quite common for the “brewer” to be missed off such “paraphrases”, and also from supposed direct quotations, mainly, I presume, from religious hostility to the consumption of alcohol).

The main point, however, is that the motivation from self-interest is not a one-way bet; the self-interest of the potential consumer also counts and differences between the producer and consumer are reconciled by their mediating their self-interests into a price acceptable to both of them.

Smith advises consumers to “address” the other’s “self-love”, while refraining from addressing ”our own necessities”; instead address “their advantages” from concluding a transaction. In short, from offering them a “bargain”: “Give me that which I want, and you shall have this which you want” (WN I.ii.3: 26). The parties are not just “price” takers – they bargain, and do so in condition where there is competition emanating from the presence of other buyers and from other sellers.

Emord goes on to assert that “Government is that great parasite that the Founding Fathers viewed as a necessary evil, one to be limited and checked so as to avoid its intrusion into our daily affairs.” I cannot speak with authority on the “Founding Fathers” viewing government as a “necessary evil”, as in that they preferred not have a government, but I suspect this view is exaggerated.

The duties of government, according to Smith, were to cover the expenses of “defence”, “justice”, certain “public works and public institutions” and the “dignity” of the “sovereign” (WN V.a.b.c.d.e.f.g.h:663-814).

Smith noted that defence was “of much more important than opulence” (WN IV.vii.30: 464-5), justice was the absolute necessity of society (without justice society “would crumble into atoms” (TMS II.ii.3.4: 86), public institutions were “necessary to facilitate commerce”, including public education (“gross ignorance and stupidity” threaten the “safety of the government” and “frequently occasion the most dreadful disorders” (WN V.i.f. 61: 788) and palliative health care (WN V.i.f.60: 787-8), and (substituting the ‘sovereign’ by ‘government’), enabling the government to “perform its several duties” (WN i.h.i.1: 814).

Smith denounced the role of several governments in pursuing the wrong policies, summed an “mercantile political economy” and challenged the competence of ministers to make decisions on behalf of the individual, but he did not preclude government enacting certain measures and enforcing them through the courts on the conduct of individual “merchants and manufacturers” when they acted against the public interest. In particular, the early forms of banking outside of any regulations to protect the public interests were dangerous to prosperity, and he advocated certain interventions to protect against “misconduct”.

These interventions he conceded were a “manifest 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 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).

The popular image among certain sections of Adam Smith being the enemy of government (the advocate of the “night-watchman state”) is quite false in its generality. Indeed, the metaphor of the “night-watchman state” was an expression introduced by Ferdinand Lasselle, the 19th-century firebrand socialist, and not Adam Smith!

It was the policies of 17th-18th century governments that Smith railed against, and not the fact that they had policies. Because Smith criticised many of the then existing policies of governments, many readers in a hurry concluded he was opposed to all government policies.

Adam Smith was not an ideologue. He observed that legislators and those who influenced them, especially the special interest groups of “merchants and manufacturers”, commonly were the worst offenders. From this background he did not advocate “laissez-faire” – he never used the words - because he could see where leaving policies to the parliamentary clients of “merchants and manufacturers” had led Britain.

Whether, Jonathan Emord’s “overnight” prescription would work if implemented – which would require the legislature to enact it, many of whom are tied, sometimes by “obligations”, others indirectly by constituency special interests – is another question. It is not a serious (as in likely to be enacted) proposition.

Announcement - temporary no connection from 11am UK time

I am travelling back to Edinburgh from France today (Saturday) and will reconnect, all being well, later this evening.

It looks like an interesting debate is commencing between myself and Bruce on the geo-historical formation and evolution of property (see my post on the ideas of Bruce for Thursday and follow the links to Bruce's website).

An Early Non-Believer in the Invisible Hand

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Thirty-two years ago I reviewed a book for the Times Higher Education Supplement by John Cornwall, 1977, Modern Capitalism: its growth and transformation (Martin Robertson).

It is among my library in France and I looked it up yesterday. In its preface I found this reference to the invisible hand:

"To put the matter somewhat differently, what is downgraded in the pages that follow is the view that economic events are the outcome of some invisible hand guiding an economy through time and space in some predetermined way, with the outcome depending only upon some assumed initial conditions" (Preface, page x).

Comment
Of all the references to the metaphor of "an invisible hand" I have read lately - and believe me I have looked up and read moany more than a few (my notebook is up to page 84) - this is the only one, including a couple of self-proclaimed marxist/radical authors, that specifically rejects the use of the "invisible hand" to account for economic activity.

Some books, mainly published before 1945, of course, do not mention the invisible hand at all, my contention being that the metaphor of the "theory", "concept", "paradigm", of the invisible hand is a modern invention, attributed wrongly to Adam Smith from the post-war years, singly at first in the late 1940s (Lange, Samuelson) and then in a flood-like ubiquity (if I may allowed such a violent expression) from the early 1970s.

Thank goodness for John Cornwall, then of Dalhhousie University, to resist the early torrent of mysticism and present his analysis shorn of a metaphor that has no role in serious economic analysis.

I wonder what happened to John Cornwall.