Tuesday, January 05, 2010

Almost Right, But No Cigar

Carlos Navaro, Online Journal, writes (5 January) HERE:

“Meet the real Adam Smith”

“Time to debunk the propaganda and myths: Modern-day American capitalism is not totally synonymous with free enterprise; making money is not necessarily the same thing as creating wealth; Wall Street and big government are but flip sides of the same power structure; the big-time money makers behind the scenes who finance the careers of political leaders and, in fact, write for them the laws that make their dealings legal are not entrepreneurs in the true sense of the word.

In his iconic The Wealth of Nations (1776), Adam Smith exposed and warned against the kind of corrupt laws and customs that in his day stifled free markets.

Unfortunately, few mass media pundits nowadays have read the book or, if they have, they deliberately ignore its message, latching instead on the author’s “invisible hand” simile, quite out of context, to justify the unbridled greed of making money for its own sake. They conveniently fail to mention that Adam Smith was first and foremost a moral philosopher, not the amoral, dog-eat-dog economist that he has been portrayed to be, as is evident in his other classic, The Theory of Moral Sentiments (1759).

Adam Smith’s moral philosophy was simple enough. … the only way to assure social stability was by allowing [people] to freely exchange labor, goods, and services for profit. If you have something that I want and I have something that you want, and if no king or deity prohibits us from trading what we want from each other, and if whatever those wants are, are not harmful to society, then despite our religious and political differences, whether we like each other or not, we can live in harmony. … Taken at a mega level, it was clear to Smith that the whole of society, as if guided by an “invisible hand,” would benefit from this competition.

Therefore, the main, if not the sole, role of government, according to Smith, was to assure that the competition was free and fair, and, moreover, that the competitors were imbued with a moral conscience, for otherwise the completion would degenerate into the law of the jungle. In his calm, philosophical voice, Smith noted how in his day the overlong terms of apprenticeship (a form of slave labor), the local restrictions against laborers from outside communities, the collusion among wealthy owners of land and capital to set prices, the stashing of bank gold deposits in private coffers and covering withdrawals with unsecured paper notes -- stealing the gold, in effect -- were, among other ruses, preventing the “invisible hand” from working its magic.

Adam Smith, for the record, was a man of modest tastes and means. The fabled guru of capitalism was no capitalist. He never owned a business or held a private sector job. His most remunerative employment was in the public sector as commissioner of Customs in Edinburgh.

Carlos Navaro is right about the comparative power structures of 18th-century Britain and modern-day societies like the USA and those found in Europe, including 20th-century Britain. The parallels are striking. Did they ever change?

The power-elite, thanks to the press, the 24-hours news cycle, and the Blogosphere, particularly the less-constrained latter medium, is under constant view and exposure.

Smith’s Wealth Of Nations exposes the close alliance among the sovereign, his legislators and those who influenced them, the large landed-estates and the burgeoning merchants and manufacturers, en route to becoming the most powerful force in the land from a few decades later.

Smith’s main target was mercantile political economy – the fallacy that a country grew rich (and, therefore, could afford large armies to fight in Europe’s dynastic wars) by exporting more than it imported (the countries it traded with were often seen as the enemy, not as partners in joint prosperity) and, crucially, a country’s merchants and manufacturers prospered if they were state regulated by the King awarding to selected favourites a chartered monopoly status.

Smith’s stance of opposition in Book IV to mercantile political economy has often been misunderstood; he didn’t oppose all government action and intervention, he opposed the then current government’s actions and interventions where they curbed natural liberty and held back progress to “opulence” and diverted activity into prodigality. This also included the great diversion of scarce capital and labour into colonial monopolies, and their defence in particular.

Carlos Navaro gets most of this right. He begins well in identifying that they misread and thereby misuse the “author’s invisible hand simile, quite out of context, to justify the unbridled greed of making money for its own sake.”

I excuse Carlos Navaro’s misnaming Smith’s use the metaphor (not a “simile”!) of “an invisible hand”, but was relieved to see he condemned the modern version that uses it to “justify the unbridled greed of making money for its own sake”. Well done, I thought.

But reading on, I was disappointed – hence, no cigar – when he wrote about that competition would benefit society when allowed to operate “as if guided by an “invisible hand”.

If Smith had formulated his use of the invisible hand in such a manner that it operated “as if”, then it would be a simile, but he didn’t, nowhere, ever, use “as if” in association with “an invisible hand”.

The simile we can live with – it clearly implies that there isn’t an invisible hand –but the metaphor has become a belief that the invisible hand actually exists, which is nonsense when you think about it, unless you believe in the divine guidance of all the details of human society.

My concerns were compounded when I read that Smith’s critique of mercantile political economy, practised through legislation, prejudice and warfare, let alone the domestic policies of the Apprentices Statutes, the Settlement Acts, the Incorporated Town Guilds, and Cromwell’s Acts of Navigation, prevented “the invisible hand from working its magic”.

That may well be Calvos Navaro’s belief, but it was not Smith’s.

He never linked the invisible hand metaphor to markets on the single occasion that he used it in Wealth Of Nations (or in the other occasion in Moral Sentiments). If we are to “debunk propaganda myths” about US capitalism, we ought not to carry on with modern myths about Smith’s use of the invisible hand metaphor, a wholly contrived invention by modern economists since the 1950s.

Calvos Navaro’s takes a few steps in the right direction of understanding Adam Smith (hence, congratulations) but then falls back a step or two from buying another modern myth, hence no cigar, on this occasion.

Incidentally, Adam Smith, for the record, had one private enterprise job: he took the young Duke of Buccleaugh and his brother to France as their private tutor from 1764 to 1766, his only post outside the public and semi-public sector, for which he received a salary and a life pension from the Buccleaugh estate until 1790.



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