Friday, December 18, 2009

A Twisted Tale of Falsehood About Adam Smith

Niall Ferguson, a distinguished historian, writes an interesting, if inaccurate and perplexing piece, “Dead Men Walking: why 2009’s truly top thinkers are yesterday’s news” in Foreign Policy (18 December) HERE.

Ferguson’s theme is somewhat predictable, given recent events in the global economy, and fairly consistent presentations of Adam Smith’s alleged writings since the 1950s.

Where before not hold – and certainly did not hold such attributions to anything like the degree to which modern economists credited to him – it is now fashionable to announce, if not recantations of their earlier errors, then certainly what amounts to mealy-mouthed confessions that their earlier attributions showed Smith to have been wrong, while failing to recognise, let alone admit, that it was their attributions that were false, not Smith's ideas!

I find it difficult to express my frustration at this approach, so carefully constructed by Niall Fergusson in “Dead Men Walking”, because it shows many modern economists have learned nothing from the impact of the events leading to a revision of their past views. Here is a sample of his approach:

It has, for example, been a bad year for Adam Smith (1723-1790) and his "invisible hand," which was supposed to steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets.”

Coming at the head of Ferguson’s Dead Men Walking”, this unqualified nonsense sets one’s heart thumping.

Ferguson justifies the wrong, absolutely wrong, attributions of Smith’s lost legacy, instead of, perhaps, revisiting Wealth Of Nations to check the validity of his false attributions.

After all, Ferguson, a distinguished historian by any measure, should practise elementary scholarly caution by checking his references back to the original texts and compare them with their modern interpretations.

My own books, Adam Smith’s Lost Legacy (2005, Palgrave) and Adam Smith: a moral philosopher and his political economy (2008, Palgrave), with all their defects, can modestly claim to have identified where the modern misattributions are located.

How did Adam Smith’s modest use of a popular 16th-21st century metaphor once only in Wealth Of Nations (and once only in Moral Sentiments), in reference to the preferences in mid-18th-century of some, but not all, merchant traders to trade locally, rather than undertake the greater risks of foreign trade, manage leap across the years to the mid-1950s and onwards, and supposedly “steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets”?

Moreover, given the counter-factual that the ‘global economy’, or main parts thereof, never come to be characterised by “individual choice in unfettered markets”, I find it difficult to understand how a top historian can look outside his window, or review his case notes, or read the papers, and write such a sentence and still attribute the false view to Adam Smith.

Pure laissez-faire was never a notion attributable to Adam Smith (see Jacob Viner, 1928, Adam Smith and Laissez faire). In fact, he never used the words at all, anywhere in his writings or correspondence.

The myth that he did so began to spread in the mid-19th century such as from John S. Mill 1849; the Manchester School; Cobden, the editor of The Economist, and assorted speeches in the House of Commons on behalf of mill-owners and manufacturers, and lazy authors, sub-editors, and other who did not read Wealth Of Nations (or they only read isolated, out of context, sentences which they gratuitously transposed to suit their claims). They quoted the only French they knew, or could remember, because others they read said so.

It sounded Smithian. But Smith always emphasised that the main enemy of competition was monopoly and the main legal protection of monopoly was particular (but not all!) government-sponsored state regulation, and illegal collusions among corporations. He commented that legislators and those who influenced them, giddy with the false arguments of mercantile political economy, used regulations to stymie competition, whether from other merchants (and would-be merchants) and their employees through collective action, plus, of course, legalised protectionism, tariffs and prohibitions.

En passant, Ferguson makes another slight against Adam Smith with this bundle of nonsense:

‘…At a time when other University of Chicago-trained economists were forging the neoclassical synthesis -- Adam Smith plus applied math -- Minsky developed his own math-free "financial instability hypothesis".’

There is a world of difference between the maths of “the neo-classical synthesis” and Adam Smith's writings. While Adam Smith was an accomplished mathematician by 18th-century standards and expressed his admiration for mathematicians(TMS III.2.20: 124), he did not conceive of humans in society as reducible to equations. He had nothing to do with the invention of Homo economicus in the late 19th century.

He specifically rejected the idea in his (famous) comment in Moral Sentiments about the “man of system” who “seems to imagine that he can arrange the different members of society with as much ease as the hand arranges the different pieces on a chess–board …” but “in the great chess-board of human society, every single piece has a principle of motion of its own” (TMS VI.ii.2.17: 234).

Interestingly, those “University of Chicago-trained economists” who “were forging the neoclassical synthesis” to whom Ferguson refers, were also among the first to invent the wider modern role for the metaphor of “an invisible” hand in the 1930s.

Paul Samuelson, who died recently, aged 94, graduated from Chicago in 1935 and was the first to note the dangers of taking the metaphor too far (Samuelson, Economics, 1948, page 36). Ironically, after Samuelson, most authors of textbooks did just that.

But at the end of his article, Ferguson drops his headline of Smith, and others, being “Dead Men Walking”, and commences a partial resurrection of their reputations:

“…So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending -- not to mention distortions of currency markets by central bank intervention.”

Taking the last sentence on its own, there was no need to write the first part of his article in the manner in which he did. Many readers might well stop after the first page, miss the second and third pages, and from the reputation of the author, remain attached to the new myth about Smith being the cause of the recent recessions and global financial crises!

That he wasn’t, in historical truth, and wasn’t in recent fact, makes Ferguson’s article more than unsatisfactory.

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Blogger Justin D. Tapp said...

In Road to Serfdom, Hayek approves (assumes, really) government-provided health care. Libertarians like to ignore that, and Ferguson definitely does, but it's in there.

6:34 pm  
Blogger said...

I love it when people make mistakes while correcting the supposed mistakes of others. Samuelson was 94 at his death, not 92 as claimed here.

7:27 pm  
Blogger Gavin Kennedy said...


Many thanks for pointing our a minor clerical error in the post on the age of Paul Samuelson at death. Of course. errors should be corected as soon as we become aware of them.

No doubt James Maddison University provides faculty with clerical, administrative, and research asssistance support.

It all changes when you retire, as you may one day find out.

However, my culpability is as nothing compared to readers of Samuelson in respect of the issues discussed in the post, as interpreted by faculty across the discipline, most of whom were exposed to the unqalified broadening of Smith's original use in their textbooks and inexcusably attributed their general invented meanings to Smith.

Samuelson's first mention of the problems that may arise in the use of the "invisible hand" metaphor by faculty at Chicago in the 1930s (he graduated there in 1935), as expressed on p. 36 the first edition of of his world-popular textbook, Economics in 1948.

Compare the sceptical treatment he gives the misuse of the metaphor in that edition, which to his credit he more or less maintained in later editions while he remained involved as author, with editions of rival cloned textbooks from the 70s onwards.

The myth of the invisible hand is now ubiquitous.

That is my main target - though I'm like a gnat against a charging elephant.


8:29 pm  
Blogger Jim Harrison said...

I guess Ferguson is a distinguished historian if that simply means that he plays one as a talking head on TV. In fact he is a rather mediocre historian, though a world-class self promoter.

9:37 pm  
Blogger Gavin Kennedy said...


Thank you for your observation.

When disagreeing with someone in academic discourse, whose proficiency in a subject with which one is in no way an authority - in my case, in academic history - I have understood the norm of polite caution to be polite about that person's standing in order to avoid the reposte of making an ad hominen attach, instead of a case against their ideas.

In my criticism of Ferguson's history of economic thought, I judged his views on their merits, as an economist. You may state your views about his qualities as an historian, of which I could not possibly comment.

But thanks for your input.


8:08 am  
Blogger Gavin Kennedy said...

JD Tapp
Thank you for your observation on Hayek.

Smith made a tentative step towards publicly funded health measure in Wealth Of Nations, in regard to a need for the "most serious attention of government":

"in the same manner as it would deserve its most serious attention to prevent a leprosy or any other loathsome and offensive disease; though neither mortal or dangerous, from spreading itself among them; though perhaps, no other publick good might result from such attention of so great a publick evil." (WN V.i.f.60: 787-88).

The 18th-century notion of "police" included public spending on measures for public sanitation services, removal of waste, and for pavement lighting, all of which by a sort of osmosis, crept to ever wider roles, often by private subscriptions, to the establishment of hospitals, and medical services in mid-19th century. Edinburgh's Royal Infirmary has a long wall mural depicting the growth of health services in a mixture of public and private funding from the 18th century.

Whether this history would please Libertarians, I know not.

(Apologies for 'missing' your comment until today).

8:25 am  
Blogger entech said...

I have enjoyed watching and reading Niall Ferguson, interesting and well presented stuff. I would be prepared to consider this article as an aberration.
Professor Rosser on the other hand, with a long academic history and coming from an academic family, lets himself down badly with such a supercilious remark. Perhaps he should read more Smith and less Rothbard.
Could it be that the gnats bites are beginning to affect the elephant? We can but hope.

5:39 am  

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