New Critique of Modern Myth of the Invisible Hand: Part Two

Kaushik Basu’s critique of neoclassical economics (of which I am broadly sympathetic) is spoiled by its basic flaw of importing the false premise that the first welfare theorem had somehow been inspired by something from Adam Smith’s use of the metaphor of ‘an invisible hand’, and, therefore, it is safe to associate the assertions drawn from this error by neoclassical economists as fundamental errors attributable to Adam Smith.

Basu has not considered the possibility that neoclassical economists were wholly in error to draw such a link to Adam Smith.

Worse, as a consequence, Kaushik Basu in his own critique of neoclassical economics, he ignores much of Smith’s writings on the self-interest of individuals, its mediation in social contact with others, on the definite moral limits to competitive behaviour, on the immorality of greed (a ‘vile’ characteristic ‘the rulers of mankind’, for which, sadly there was ‘no remedy’) and his oft expressed view that those who laboured and upon whom the rest of society depended were entitled to a fair share in what they produced. He also believed that ‘opulence’ from ‘improved (non-feudal) agriculture’ and the promise in commercial society could bring this about – we call it affluence.

Those associated with ‘market fundamentalism’ and, implicitly, the status of so-called ‘Homo economicus’, a mathematical abstraction unknown to anthropology, let alone to Adam Smith who was, incidentally, someone accomplished in mathematics, according to his contemporaries, were carried away in their ideological contest with the greater errors of Marxist contemporaries in the 1930s and during the Cold War decades.

None of the neoclassical triumph was remotely related to the works of the Adam Smith born in Kirkcaldy. An invented Adam Smith may have been ‘alive and well in Chicago’ and known to George Stigler, but he remains unknown to readers of Smith’s Works and not just familiar with few well-worn quotations absent their context.

The great deception began to take root in the classrooms of our universities and received an immense boost from Paul Samuelson, right lauded as a brilliant exponent of the mathematical approach to economics, as a ‘science’. He wrote:

“[He] was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of the ‘invisible hand’: that each individual pursuing only his own selfish good, was led as if by an invisible hand to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious” (Samuelson P. A. 1948, ‘Economics: an introductory analysis’, p 36, McGraw-Hill).

Kaushik Basu buys this transmutation of what Adam Smith actually wrote and present it as a ‘central opinion’ which is:

‘a body of intellectual material that describes how a modern economy functions, and assures us that as a system, the current world economic order, founded on individual selfishness and the “invisible hand” of the free market, is right or, at any rate, the best among what is feasible. It may not always function as it should but as an ideal, it is the right one to pursue and uphold” (Basu, K. p4).

There are two problems here. First, both Samuelson (1948) and, 62 years later, Basu (2010), unforgivably, were factually wrong, not about an obscure 18th-century author’s written views, but about, arguably, the world’s most famous name in economics, his works widely available in multiple languages and available in most libraries and online. So no excuses then. Moreover, these works of Smith were also available widely to most other economists.

Secondly, the expressed errors of the two authors above, are also endorsed by most economists both in what they claim Smith wrote and in what many others, including Kaushik Basu, assert is wrong with the ‘central opinion’ of modern economics supposedly based on the mythical views of Adam Smith.

The alleged views of Paul Samuelson and Laushik Basu on Adam Smith are not based on facts, including the central myth of Smith’s use of the metaphor of ‘an invisible hand’.
All this detracts from the chapters that follow in Basu’s new book, which I am now reading. Much of the criticism he now refers to against neoclassical economics are familiar to those who have read wider than the diet of mathematical abstractions that passed as the qualifying criteria for worthiness in our discipline.

I shall return to these issues as I read on. Basu's comments in these fields are worthy of your attention, and I continue to commend his new book to readers:

Kaushil Basu, Beyond the invisible Hand; groundwork for a new economics. 2010, Princeton University Press,

The Real Adam Smith Still Unknown in Edinburgh

Today’s (28 November) leader in Scotland on Sunday (Edinburgh) (HERE):
contains this in a piece on UK Bond markets:

“Break the bonds”

“WHEN Adam Smith wrote about market forces in The Wealth Of Nations he described an investor being "led by an invisible hand to promote an end which was no part of his intention".

Like so much of what Smith said this has often been misinterpreted.

The fundamentalist view of capitalism has it that market forces are a force for good per se, and that even when they appear to be out of control they are not failing, they are merely adjusting and correcting themselves. The market is therefore possessed of its own dynamic, it's own irrefutable logic; the invisible hand belongs to an infallible deity that cannot do wrong.

After the events of the past two years the number of those who still advocate a form of capitalism that is completely unfettered and unregulated has - unsurprisingly - diminished somewhat. The general view is that a framework of control is necessary, if only to save the corporate world from its own misjudgments and excesses. There is too a greater acceptance of the notion that corporations owe a duty to more than just their shareholders - that they also have a wider social responsibility to the societies in which they operate.”

Comment
A parody does not a case make (though I wish them luck, expecting as I do that they will be disappointed - the Leviathan of debt, so to speak, is out of the bag). Having correctly recognised that "what Smith said ... has often been misinterpreted" the writr goes on to do exactly that - misrepresent what Smith said.

First of all, Adam Smith was not writing about ‘market forces’ when he made his singular reference to the metaphor of an invisible hand in Book IV of Wealth Of Nations) (he wrote about market forces in Books I and II – the leader writer should know that fact when writing in the city where Adam Smith lived).

By using the modern sounding word ‘investor’, the author creates a false impression about Smith’s topic having relevance to modern corporations and bond markets.

But of even greater importance is the plain fact that Smith referred to another problem, relevant in the 18th century and not as relevant to modern capitalism in the 21st.

He discussed the behaviour of some, but not all merchants, who preferred to invest their capital in ‘domestick’ activity rather than send it abroad to Europe or the North American colonies, which this particular group of men considered to be too risky for their sense of ‘security’ compared to the home trade.

They were, to coin a more modern phrase, more ‘risk averse’ than those merchants who invested abroad. They knew better those potential local partners with whom they were most familiar, they knew the probity of these local men, and ‘should they be deceived’, they had more faith in local courts and their judgements, compared to the habits, probity and courts of distant foreigners, including the colonists.

It was their sense of insecurity that led them to invest locally – his sense of insecurity was the invisible hand, which Smith used metaphorically to illustrate in a ‘more striking and interesting manner’. This is what Smith taught in his lectures on Rhetoric at Glasgow University (and most likely in his Edinburgh public lectures too).

The Leader writer’s description of the “fundamentalist view of capitalism” is accurate, but this had nothing to do with what Adam Smith wrote about in the context of the metaphor of ‘an invisible hand’. That is connected to Adam Smith is a modern and false (‘made up’, ‘invented’ and ‘unfounded’) attribution from the 1950s, of which Samuelson’s description of Smith’s invisible hand in his textbook, Economics (1948, p 36), was the first of many from epigones of epic proportions. It is now believed with almost religious faith by most modern economists – I know; I have had many a joust with some of them.

The Leader writer quotes them: “the invisible hand belongs to an infallible deity that cannot do wrong”, words or ideas that were never expressed by Adam Smith either in Wealth Of Nations or Moral Sentiments.

For Smith, market forces were human in cause and shape. They arose and evolved over many millennia from the pre-historic discovery of the simple trait of the ‘propensity to truck, barter, and exchange’ (Note that he did not mention ‘trade’ in this context). This propensity was long established among humans before commerce brought it to fruition in the North-West corner of Europe from about 300 years ago, having stalled by the fall of the Roman Empire in the 5th century and stagnated in China about the same time.

New Critique of Modern Myth of the Invisible Hand

I am reading a most interesting and, from the point of view of Lost Legacy, a most significant book. I refer to Kaushik Basu’s new book, published this month by Princeton University Press, “Beyond the Invisible Hand: groundwork for a new economics” (ISBN 978-0-691-13716-2; see Amazon).

What makes it so interesting to me is its approach. It accepts, indeed celebrates, the Adam Smith ‘myth’, namely the one created by modern economists from the 1950s, that Adam Smith’s use of the metaphor of the “invisible hand” was a “great idea” directly linked to the modern derivation of the Welfare Theorems embedded in mathematical theories of general equilibrium (Arrow, Debreu, etc.). Basu does this without in any way realising or accepting that this myth is itself a myth.

Basu’s interpretation is a misreading of what Adam Smith wrote, as shown countless times on Lost Legacy. The modern myth creates an edifice without foundations. Smith never said what the modern myth requires him to have said – it is a backward projection of modern ideas onto a text that does not support them.

He also presents his version of the modern myth with a startling admission: “it is sobering to recall that [Smith’s] theory of the invisible hand would remain a conjecture for close to two centuries after the appearance of his classic, An Inquiry into the Nature and Causes of the Wealth of Nations, despite the copious writings by Smith himself and his successors in political economy” (p 9). This fact, which is endlessly reported on Lost Legacy, is challenged by modern economists, such as Daniel Klein and David Friedman to mention two distinguished scholars who have appeared on this Blog, and many others at the seminars I have addressed since 2005.

By interpreting what Smith ‘really meant’ or ‘implied’, such critics can and have loaded Smith with the burden of their imaginative assertions about Adam Smith’s meaning, mainly from later authors, but not with definitive evidence in Smith’s texts. Basu adds: ‘It took mathematical economics, and the research of Kenneth Arrow, Gerard Debreu, Lionel Mackenzie and others for it to be given formal shape and proof’. This is roughly where Samuelson introduced the first of his 4½ millions readers of his popular textbook, Economics (1948, p 36: McGraw-Hill), to an early version of the modern myth, and has repeated in through its 19 editions.

Basu also observes that: ‘it is surprising to most contemporary economists who have not read The Wealth of Nations to learn that the invisible hand theory is not central to Smith as it is made out to be” (p 10). Absolutely true, but from which observation Basu draws precisely the wrong conclusions. He suggests that the 19th-century ‘orthodoxy’ (his name for the modern consensus) of “John Stuart Mill and John McCulloch” (to which names he could add Malthus, Ricardo, Marx and almost all other writers after Smith) saw the role of the market absent an invisible hand guiding it.

Basu, however, is correct to note that the 19th-century treatment of Smith as a fundamental ‘free market’ ideologue (laissez-fare, night-watchman state, and all that), was false and so is the claim that the ‘proof’ of his so-called Invisible hand theorem, was a ‘mathematical vindication’ of his alleged ‘belief’ (p 11).

You can imagine my excitement as I read Kaushik Basu’s most promising book (I shall continue reporting on it for more posts on Lost Legacy and I encourage readers to obtain a copy and read I with me).

Its author has stepped towards my criticism of the modern myth, albeit without accepting my position on it, by showing that the modern myth has misled economists into confusing their models with reality (the economy does not function as their maths appear to indicate) and by re-drafting what is closer to what really happens (which “entails a leap of imagination”), he will show where the “Invisible Hand Theorem” ceases to hold, and why. I shall report on how he sets about this, because Basu’s book is the first serious study of the modern myth related to the ‘Invisible Hand’ I have seen anywhere.

I understand the political benefit of not attacking everything about modern economics to get a fair hearing from the profession – and I thereby excuse Basu’s intentions as stated in the first chapter – and I wait to read how he goes about his reconstruction of the welfare theorems for my final judgements.

Adam Smith and Religion

“The Alleged Religiosity of Adam Smith”, a paper I presented at the Summer School for the Preservation of the History of Economics held at the University of Richmond, Virginia, was video-recorded and is on You Tube (HERE).

It is not of high quality, at least on my PC - it's actually quite awful (I only became aware of a tv camera when well into my talk) – but if you persevere you will get an idea of my theme, which I have been working on for a number of years now and which is the subject of my chapter for the Oxford Adam Smith Handbook 2011.

The discussion that followed was challenging, and went on informally afterwards.

You will also catch a glimpse of the excellent facilities at the Summer School for listening live to a number of leading lights (and newer scholars) in the field of the history of economic thought and for discussing with them informally in a productive learning environment.

The June 2011 Summer Institute is at the planning stage and I shall post details on Lost Legacy as I receive them from Sandra Peart and David Levy, the organisers.

An Indian Review of Nicholas Phillipson's New Book

From The Hindu (India’s National Newspaper), a review of Nicholas Phillipson’s, ‘Adam Smith: An Enlightened Life’ by K. Subramanian (HERE):

“Adam Smith: his life & times”

“Phillipson's account is more about the intellectual evolution and contributions of Smith than about his life per se.

Adam Smith is one of the most celebrated authors in history and, as it emerges from a close study of his writings, the most misunderstood as well. For the defenders of capitalism, he is a messiah. In truth, he had no such pretensions.

There are many who venerate him even after the recent crisis and the near-collapse of global capitalism, and many others who despise him. There are scholarly blogs on Adam Smith's lost legacy. Noam Chomsky described him as “pre-capitalist, a figure of Enlightenment,” and went on to lambast how people read snippets of Adam Smith and the few phrases they teach in schools and don't get the full import of Smith's philosophy.

Indeed, Smith was a creature of his times. More importantly, he was also a contributor to the intellectual fervour of the times. Later historians described the developments in the 18th century as the ‘Age of Enlightenment'. …

… Unfortunately, Smith was a very private or secretive person. He had friends; but hardly communicated with them. He left behind very few letters. He did not marry and the only woman he was close to was his mother. Like Franz Kafka, he wanted all his private papers to be destroyed. While Kafka had in Max Broad a friend who disregarded his wish and got them published posthumously, Smith ensured the destruction of his papers.

Daunting task
Writing the biography of Adam Smith should have, obviously, been quite a daunting task. What Nicholas Phillipson has done is an achievement beyond measure. His bibliography runs to 12 pages covering historical and other biographical accounts. He has also drawn upon the notes of a couple of students to trace the development of Smith's views on many issues. Truly, it is a tour de force. …

… Smith's two books have to be taken together to get the message. It was unfortunate that The Wealth of Nations came to acquire notoriety as a fundamentalist's apologia for capitalism.

These words should chasten the later-day reform zealots. It is to the credit of Phillipson that, in a lucidly written and persuasively argued book, he has restored the real contributions of Adam Smith. The book is a rare academic achievement.”

Comment
While not much may be known about Adam Smith as a private person a great deal is known and knowable about Adam Smith’s contributions to the times he lived in and his relationships with the people in the institutions.

These can be seen in Ian Ross’s excellent biography, ‘The Life of Adam Smith’, 2010, 2nd edition, Oxford University Press.

What Adam Smith did not leave in his own hand for posterity, Ian Ross has detailed in a lucid and most admirable text, which digs a great deal from contemporary records.

I would suggest that Ross adds enormous context to Phillipson’s necessarily shorter and narrower ‘intellectual biography’, including his making excellent use of Smith’s surviving correspondence and the known facts about Smith’s life, which scholars may find missing when deriving a balanced view purely from his ideas.

Overall, the balance from the many reviews of Phillipson – of which I include my own admiration for his achievement, accepting that I was able to add in the relevant background from my readings of Adam Smith’s works, and, I candidly affirm, from my study of Ian Ross’s two editions of his Life of Adam Smith (1995 & 2010) – has been very favourable, as evidenced by the reviews I have quoted on Lost Legacy.

I would not want readers to form the opinion that somehow the biographical details brilliantly covered in Ross are in any way redundant. For these Phillipson is not sufficient; it is, however, necessary.

Nicholas Phillipson in Conversation With Russ Roberts

Russ Roberts of Econtalk hosts a discussion with Phillipson on Adam Smith HERE: -about 70 mins.

“Nicholas Phillipson, author of Adam Smith: An Enlightened Life, talks to EconTalk host Russ Roberts about the life of Adam Smith. Drawing on his recent biography of Smith, Phillipson discusses his intellectual roots, his intellectual journey, and what we know of his influences and achievements. Phillipson argues that Smith was shy, ambitious and very well-liked. He highlights the influence of Francis Hutcheson and David Hume on Smith's thinking. Phillipson gives his take on how the ideas of The Theory of Moral Sentiments mesh with The Wealth of Nations and argues that the Theory of Moral Sentiments was a response to Mandeville and Rousseau.”

Comment
Russ Roberts makes comments as Nicholas Phillipson discusses Adam Smith. It is not always clear as to which of them is speaking, especially in references to the metaphor on “an invisible hand” (which has a special, almost messianic, place in Econtalk discourses on Adam Smith). The podcast is still worth listening to or reading in summary. It contains much of interest and relevance to Adam Smith studies.

An Economist Who Has Read and Understands Adam Smith

Government's role in a free-market economy

By Vijay K. Mathur
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden. His articles also appear in vijaykmathur.blogspot.com. He offers original blog posts for the Standard-Examiner at http://blogs.standard.net/economics-etc/ HERE:

"Among many people, politicians and media pundits, there seems to be confusion about the operation of free markets. Sometimes the word capitalism is used to propagate the notion of free markets. However the word capitalism came into use almost one hundred years after the publication of The Wealth of Nations in 1776 by Adam Smith, the most ardent supporter of free markets. Capitalism should not be confused with the system of free markets. Like markets, capitalism is evolutionary, however it encompasses not only economic organization but also political and social organization.

According to Adam Smith, self-interest (not selfishness), property rights and division of labor are three important interrelated pillars of economic growth. Property rights, if clearly defined and enforced, ensure that people are free to transact their goods and services at positive prices. Self-interest of sellers to make profits and of buyers to obtain products they prefer at the lowest prices brings sellers and buyers together in a market transaction. Self-interest in competitive markets maximizes economic welfare of the society. If free and competitive markets work, they efficiently allocate products among consumers according to their preferences, allocate inputs among producers, and enable producers to obtain the maximum output with given amounts of inputs. Division of labor facilitates scale economies to bring down costs.

However, there are circumstances when markets do not perform their function efficiently. Economists refer those states of the markets as market failure, a point missed by many who blindly promote virtues of free markets."

Comment
At last! (Minor quibbles excepted).

Vijay K. Mathur, an economist who understands what Adam Smith was on about in contrast to most of those educated by almost all university economics departments across the world since the 1950s, where Adam Smith’s ideas, to put it somewhat crudely, were made up by those who should have known better and should have been checked for accuracy by the natural skepticism that is part of their education. After all, many of them had access to Wealth Of Nations and could have read for it themselves.

Listen to Nick Phillipson on Adam Smith on What Human Beings Are Like

Philosophy Bites (HERE) or Spoken Word (HERE) offer podcasts in which Nicholas Phillipson speaks on “Adam Smith's view of human beings are like” - follow the links and then click on the podcast.

“Nick Phillipson on Adam Smith on What Human Beings Are Like”

"Adam Smith, the great thinker of the Scottish Enlightenment, is best known as an economist, and in particular for his idea of the 'invisible hand' which operates to bring about beneficial results that may not have been sought by the people trading. But even his economic thinking is perhaps best understood as part of a broader philosophical project of a science of human beings. Nicholas Phillipson, his acclaimed biographer, discusses Adam Smith's view of human beings in this episode on the Philosophy Bites and Spoken Word podcasts."

Adam Smith On Providence

I presented a paper, “The Hidden Adam Smith in his alleged Theology" to the annual Richmond (Virginia) University Summer Institute on the History of Economic Thought in June 2009. The paper may be downloaded HERE:

Subsequently, this summer, I was invited to write a chapter: “Adam Smith On Religion” for the forthcoming “The Handbook on Adam Smith” to be published in 2011 (Oxford University Press).

Strict space and considerations of the available presentation-time, uniquely generous at Richmond, prevented me discussing fully the alleged implications of Smith’s use of providential language, claimed by many authors to demonstrate elements of Smith’s religiosity [see Jacob Viner’s essay: The Role of Providence in the Social Order: An Essay in Intellectual History ,
 Princeton University Press and American Philosophical Society (1972.

However, while drafting my chapter for the ‘Handbook’ (edited by Professor Chris Berry, University of Glasgow), I have come across and expect to continue to do so, various interesting topics within my chapter’s remit, that have proper relevance to Smith’s alleged religiosity. Because I may not have space in the chapter to deal with all such topics adequately in detail, I shall make occasional comments on them on Lost Legacy for interested readers before the necessary editorial culling cuts such topics to the available space.

My ‘religiosity’ paper attracted some critical comments on what I had asserted, to which I shall respond in the new chapter. One of these related loosely to Smith’s assertion in Moral Sentiments in the famous reference to ‘an invisible hand’:

“When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for” (TMS IV.1.10: 185).

[You may also consult the TMS passage and its textual context Here:

My brief comments on the providential and theological implications of Smith’s passage included this statement in the ‘Religiosity’ paper, directly contradicting Smith’s rhetoric:

“Providence had nothing to do with the equal or unequal distribution of land anywhere on Earth. Its distribution was entirely man-made. Providence certainly ‘neither forgot nor abandoned those who seemed to have been left out in the partition’ because there was no divine partition.

The invention of property was a human social event, originally in the form of ‘traditional tribal lands’, which were often fought over (the Bible contains many bloody episodes on this happening). The intervention of divine Providence and its supposed benign role was merely gratuitous rhetorical padding, invented long after the events first occurred in pre-history”

(Kennedy, December, 2009, p 18, HERE:

Finally, I would present my main witness against Smith’s TMS assertions about Providence, from the very best witness of all, namely, Adam Smith in Wealth Of Nations.

First, some words from Smith on actual attempts at creating equal land distribution:

“Equality of land distribution was enshrined in early Roman agrarian law, but, noted Smith, subsequent (very human) events undid its prospects because the “course of human affairs, by marriage, by succession, and by alienation, necessarily deranged this original equal division, and frequently threw the lands, which had been allotted for the maintenance of many different families into the possession of a single person”, and this law “was either neglected and evaded, and the inequality of fortunes went on continually increasing.” (WN IV.vii.a.3: 556-57).

Smith was even more explicit in Wealth Of Nations (HERE):

“Of the Discouragement of Agriculture in the antient State of Europe after the Fall of the Roman Empire”

“When the German and Scythian nations over–ran the western provinces of the Roman empire, the confusions which followed so great a revolution lasted for several centuries. The rapine and violence which the barbarians exercised against the antient inhabitants, interrupted the commerce between the towns and the country. The towns were deserted, and the country was left uncultivated, and the western provinces of Europe, which had enjoyed a considerable degree of opulence under the Roman empire, sunk into the lowest state of poverty and barbarism. During the continuance of those confusions, the chiefs and principal leaders of those nations, acquired or usurped to themselves the greater part of the lands of those countries. A great part of them was uncultivated; but no part of them, whether cultivated or uncultivated, was left without a proprietor. All of them were engrossed, and the greater part by a few great proprietors” (WN III.ii.1: 381-2)

As they say in TV court-room dramas, “ I rest my case”.

As to why the two texts on the same subject apparently are so different, I discuss this in my forthcoming chapter.

Brad Delong Praises Matt Ridley on the Origins of Prosperity

From Brad Delong post in his excellent economics blog, “Grasping Reality With Both Hands”, which attracted the usual crowded comments (HERE):


“Seminar: Matt Ridley: How Prosperity Evolves

We are very happy to have Matt Ridley here, to talk about what I think is the foundational issue in economics. The very first paragraph of the second chapter of Adam Smith's Wealth of Nations says that economic prosperity rests on the:
division of labour... not originally the effect of any human wisdom... [but] the necessary... consequence of a certain propensity in human nature... to truck, barter, and exchange one thing for another...

The fact that human group sociability and solidarity is based on exchange rather than, as with chimpanzees, grooming each other or, as with dogs--well, I don't think I should go there--has, Adam Smith thought, extraordinary consequences. I think Smith was right. So does Matt Ridley. He is here to tell us about them.

Comment
It is always important when reading Adam Smith to avoid imputing meanings that are absent in his actual words. The relevant quotation refers to: ‘… truck, barter, and exchange one thing for another…”. Exchange, which is general in all aspects of life and all ages of humankind. “Trade” is often slipped in by people with modern agendas (supportive and hostile, e.g. Polyani, The Great Transformation, 1941).

Smith’s basic theme in all his works is “exchange”, which he applied in his History of Astronomy (1744-c.58 [1795]) and his essay on the origins of Language (1761), his Lectures on Jurisprudence (1762-63) and similarly in his two major works, Moral Sentiments (1759) and Wealth Of Nations (1776).

Exchange evolved into the driving force behind age of moral philosophy and the age of commerce - a kind of market place of ideas – and eventually into trade (see James Otteson, The Market Place of Life, 2001, Cambridge University Press).

Some of the expressions of incredulity about trade as a variety of exchange would be resolved by following Smith’s actual argument.”

I was prompted to offer my comment, in response to some of them:

The Gullibility of the "Efficient Market Hypothesis"

Ian Cumming writes “Poetry, Science and Value Investing” in Todd Sullivan’s Values Plays Net Blog (HERE):

“The Invisible Hand”

“The Invisible Hand” first phrased by Adam Smith in his 1776 The Wealth of Nations, is the belief that the market prices all commodities and securities at correct valuations. The belief in the market’s ability to do this can likely be traced back to 5500BC, the time of the Sumerians. Friedrich von Hayak promoted the concept that price conveyed economic data in free markets and promoted free markets with fervor. More recently it has been reflected in the use of mathematics to analyze markets use price data. The belief that market prices reflect rational and fair values has led to Modern Portfolio Theory from Harry Markowitz and The Efficient Market Theory from Eugene Fama. In the past 60yrs these concepts have dominated finance studies and led directly to the use of computers, algorithms and an extensive Hedge Fund industry.
“The Invisible Hand” belief is carried by many, but once the business cycle has returned to recession it is the SP500 Support Value Index that identifies “The Invisible Hand” as myth rather than reality. If investors were long term oriented and aware of the cyclic nature of markets, they would never be caught buying into market bubbles at tops nor would they be selling into market panics near lows. They would carefully take a valuation tool like the SP500 Support Valuation Index and make carefully considered investments.

But, this is not how markets work and it is not how most investors think but for a few who think like Ian Cumming (…and Warren Buffett and so on…). Most investors believe that the markets fairly price the value of the economy. As long as employment is rising they buy stocks and as long as employment is falling they sell. The markets appear only attractively priced at the lows using long term economic trends. In all other periods markets appear to be over priced and correlated to economic activity with most investors apparently believing in “The Invisible Hand”.

For Ian Cumming and other Value Investors “The science is in the “In”. The poetry is in the “Out”.

Comments
Neat exposition of the mania involved in the ‘efficient markets hypothesis’. Wherever the idea came from, it never came from Adam Smith.

Market prices are not invisible. If they were, how do we explain prices, which are visible to all attentive players – otherwise, if prices are invisible, how do we know the price of anything? No matter how fast they change, at any one moment, somebody can see its price – they cannot see what that price will be at any future moment.

There is no invisible-hand that ‘leads’ them to that unknowable future price. It’s weird beyond explanation that there is such an actual phenomenon, and believing that there is anything more to the myth is a curiosity, except among the gullible.

Toil, the Foundation of Life

Robert King writes on Adam Smith’s alleged “Unwarranted assumptions” in Virtue Quest (‘exploring ways to grow in virtue and overcome vice’) (HERE):

“Smith makes a number of assertions at the beginning of his work, assertions that have been taken for granted by pretty much all economists since. The first of them is that labor is the source of wealth.
Now, there is no denying that labor is one of the sources of wealth; but Smith treats it as if it is the sole and entire source of wealth.”

Comment
Robert King does not identify the other definitions of ‘wealth’ that Smith is supposed to have missed and therefore he makes his own assumption about the “meaning” of “wealth".

For Smith, wealth was the annual output of “necessaries, [subsistence goods], conveniences [additional goods that are perceived to add small and great comforts to life], and amusements [relatively flippant possessions according to taste and income] of life” (WN I.v.1. 47).

These rich ideas were in contrast to the common (c.17th century) meaning of wealth being gold, silver, precious stones, and, later, paper currencies, which were a means of exchange in monetary societies, but which had no intrinsic value in themselves and for Smith they were not wealth as he understood it – and far from their being treated by Smith as ‘mere assertions’; their evolution and history are thoroughly explained in his opening chapters (he was ‘always willing to run some hazard of being tedious in order to be sure that I am perspicuous (WN I.iv.18: 46)

Robert King reverses Smith’s order in stating: “The first of them is that labor is the source of wealth.”

In a first reading through of Wealth Of Nations it is easy to miss Smith’s distinctive historical perspective, which dominated his thinking. He said that labour was the “first” and “original source” of all wealth in the ‘original state of things’, which in primitive societies, that ‘first age of man (scavenging, hunting and fishing)’ was clearly true; what humans did to subsist upon was achieved solely by their own labour, not by gold, etc. Without their labour (or somebody’s else’s), they starved to death. Toil was the foundation of life.

Indeed, I am sure that King (who appears to be religious) knows that in the Biblical story of the Garden of Eden, Adam and Eve were put there ‘to work it and take care of it” (Genesis 2). Abundant fruit has to be picked, berries have to be collected, game has to be chased, all had to be carried, cleaned and prepared. What they collected, in Smith’s terms, constituted their ‘wealth’.

King asserts that

“The abundance or scantiness of this supply [of goods], too, seems to depend” on the productivity of the laborers. While it is true that there is no wealth without labor, it is equally true that labor must have some thing to labor upon to generate a valuable product. Wealth, or value, is not disconnected from the real stuff of the world; it is not created ex nihilo.”

This seems to imply, at least to me, that the King believes that sources of food in nature are wealth and that before a valley is ever occupied or visited by humans that ‘wealth’ was present through the eons before humans arrived, even though no human knew anything about what they had never seen. Even in the short life span of humanity (400,000 years out of millions) King considers all unknown and unused resources to be ‘wealth’ presumably in some metaphysical and meaningless sense (it took 40,000 years for humans to reach what we know as Australia; it took Homo Erectus a million years to reach China. The real wealth of these territories only had meaning in the context of humanity’s labour in making it so.

“Wealth, or value, is not disconnected from the real stuff of the world; it is not created ex nihilo", declares King. In the beginning the “real stuff” had utility only when labour was applied to it; after tens of thousands of years that “real stuff” developed “exchange value”, but only when “exchange” was joined to its utility by human beings in societies.

Food in those days did not turn up ready caught and cooked, with humans only having to open their mouths to be fed. Somebody had to labour to transform the “stuff” into edible and nutritious food.

King writes, as a prelude to declaring himself a “a homebody”, who wants “something more than ‘one simple operation to fill up the ‘employment of my life’. I have no desire to be ‘reduced’ to such mechanical production (quoting Smith):

‘First, the improvement of the dexterity of the workman necessarily increases the quantity of work he can perform; and the division of labour, by reducing every man’s business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman’ (Wealth Of Nations, I.i).

Most of his readers may not notice that King has switched to a modern society, compared to when the ancestors of 18th-century labourers in Britain were in the forest, living off their labour alone.

The division of labour in the 18th century was not a life-choice, compared to the life-choices now available to King and his family. Here, note that Smith did not invent and nor was he the first to make a note of the division of labour (Plato noted it millennia ago). Smith was a moral philosopher who observed the world he lived in and analysed it consequences. The productivity of labour reached new levels with mechanization and the re-organisation of work. Those labourers, man and boys, no doubt woud have preferred “something more than ‘one simple operation to fill up the ‘employment of” their lives. They had no real choice but to work in the pin factories. (King does not have to, because even pin-making is now mechanised and a few banks of machines make all the pins that the US needs.)

But even in 1776, Smith describes a little further along in his opening chapter (WN I.i.11: 22-24), how the common day-labourer’s woollen coat was made in a long and complex supply-chain from home and abroad, involving scores of people, each contributing their bit to the final product. Expand Smith’s example across the whole of his 18th-century society (and Robert King’s) and see how the international division of labour produces the mass multitude of products and services now regularly consumed by billions of people (including Robert King’s) to provide their living standards.

That is what Adam Smith was writing about. We haven’t all turned into ‘pin-makers’ or single-tasked automatons.

I would conjecture that an audit of all the things owned and consumed by Robert King may surprise him out of his complacent dismissal of Smith’s “assertions” about the impact of the recognition of the historic role of labour and, from a few thousand years ago, the continuing impact that the nascent division of labour in modern societies.

He might well ask just how many individuals, most of them in their millions unknown to him, who, through the division of labour, contributed to the computer he writes upon and Internet that distributes his “labor of love”, so that we who are his readers may share his thoughts and judge them.

A Fiction Expert Scholar Quotes the Invisible Hand As If It Were True

New Book: The 'Invisible Hand' and British Fiction 1818-1860
Adam Smith, Political Economy, and the Genre of Realism by Eleanor Courtemanche (HERE):

The blurb:

“Some economic ideas are too interesting to be left to economists. This book argues that Adam Smith’s metaphor of the ‘invisible hand’ – in which selfish economic actions are mysteriously transformed into aggregate social benefits in a capitalist economy – implies an entire spatial and temporal system in which the morality of any particular action can only be understood in the context of society as a whole. The ‘Invisible Hand’ and British Fiction argues that while political economists focused only on the optimistic outcomes of capitalist moral activity, Smith’s model of ironic morality also influenced the work of novelists including Austen, Dickens, Martineau, Thackeray, Gaskell, and Eliot. Their realist novels represent the reconciliation between individual ignorance and systemic overview as much less stable than the economic synthesis, using omniscient narrative voices, multiple perspectives, and humor to depict a wide variety of possible outcomes. Smith shares with the realists a vision of modern society that is structured around a fragile trust in the benefits of unintended consequences.”

Comment
This books apparently is based on a mythical idea that had no part in Adam Smith’s use of the metaphor of “an invisible hand’, namely that:

“Adam Smith’s metaphor of the ‘invisible hand’ – in which selfish economic actions are mysteriously transformed into aggregate social benefits in a capitalist economy.”

In no way did Smith say anything about “selfish economic actions”. Nor did he say these alleged actions were “mysteriously transformed into aggregate social benefits in a capitalist economy”. Markers are not ‘mysterious” as Smith shows in Books I and II of Wealth Of Nations. Markets are no invisible – price signals can be see; if they were invisible nobody would know about prices.

In fact he never said anything about “capitalist economies” (a word unknown to Smith – its first use was in English was1854 in a work of fiction The Newcomes by William Makepiece Thackerary (OED). Smith wrote about ‘the age of commerce’ not capitalism.

Eleanor Courtemanche is almost right in saying: “ Smith shares with the realists a vision of modern society that is structured around a fragile trust in the benefits of unintended consequences.”

There is nothing “fragile” about “unintended consequences”. A consequence is real, not “fragile”; it is whatever happens as a consequence of an action. Whether it is a benefit or not is something else entirely.

Adam Smith’s point in his single example in Wealth Of Nations was that those traders who preferred not to invest abroad (Europe or North America), because they perceived the risks of doing were too risky and who invested locally in Britain, added to the total domestic investment, which in consequence added to local revenues and to employment (the whole is the sum of its parts). This a benefit to employees and employers, particularly in the jobs created for the poorer majority. This was a quantitative benefit.

He said nothing about the qualitative benefits of each specific investment. As Britain at the time, and for decades afterwards, had an economy dominated by tariff protection and outright prohibitions, by other distortions caused by the Act of Apprentices, Trade Guilds, monopolies of many kinds, the Act of Settlement, Drawbacks and Bounties, and the Navigation Acts, it was not clear if domestic investment led to beneficial consequences for everybody in a general sense, and Smith certainly did not presume that it did (see his critique of mercantile laws in Book IV of Wealth Of Nations).

The claim that consequential outcomes were beneficial – even from “selfish acts” – is a wholly invented myth, wrongly attributed to Adam Smith in the 1950s onwards.

"Chomsky" Debate Concludes

There has been an exchange of posts between David Ruccio and myself on Chomsky’s assessment of the division of labour and its consequences. Chomsky, in my view, misread the references to the negative affects of the division of labour in Book V, seeing Smith’s comments on them as somehow so negative that the state had to intervene to prevent the awful ignorance arriving from them to justify Smith’s alleged call to end the further rounds of the division of labour.

In fact, Smith used the awful ignorance of the uneducated labouring poor as a rallying call for the spread of the long established practice of the Scottish ‘little schools’ to England. These locally-funded (by charitable donations, local Churches, and small affordable charges) one or two-roomed small buildings provided elementary schooling in ‘reading, writing, and account' (arithmetic) to all young boys in every parish, from 6 years old.

Parents often sent such children to work for a few pennies to add to their miserable living standards. In England, mainly, the absence of any education for the poor provided the ignorant adult labour Smith discussed in his alleged ‘critique’ of the effects of the division of labour. It was the failings of the cause of ignorance and its risks to public order, and not the division of labour that Smith warned about in Wealth Of Nations (WN Book V.i.f.48-61: 781-88).

David Ruccio, the author of the original post on his Anti-cap Blog (HERE) , has responded positively to my criticism of Chomsky’s views (in the following exchange (HERE):

“My apologies, Gavin, if I attributed to you political views you do not hold. I was merely responding to our previous exchange on the topic of Adam Smith.

I do think you underestimate the effects of the division of labor—in Smith’s writings and in general. Smith did, in my view, understand the stultifying effects on workers of the division of labor in capitalist factories. But, as you correctly note, he wasn’t willing to give up the division of labor, since it was key to the growth in the productivity of labor and, thus, in the wealth of nations. So, he proposed something else—public education—as an attempt to ameliorate the negative effects of the division of labor.

Now, we don’t even make that pretense: education (whether public or private) should be vocational education, in order to train more skilled workers for the existing division of labor. We have, indeed, backtracked from the enlightened views of Smith.”

My response:
David
I am glad we have sorted that out. Many people misread Smith on the division of labour and the education of future labourers. Britain did not sort the gap in education until the 1870 education act.

But Scotland also developed a different approach to the rest of the UK in developing the first ‘mechanics and arts’ schools movement, independent of government, for example, in my own former institution which started in 1821 as a one such school, which eventually become Heriot-Watt College in the late 19th century, and Heriot-Watt University University in 1967.
These schools trained mechanics, tradesmen and technicians in maths, physics, chemistry engineering and such like, part-time and evenings in Chamber Street, opposite the University of Edinburgh’s grand main buildings, with many of the tutors and professors of the University conducting the classes. It took sometime before England followed Scotland’s lead.

This is what I mean by the power of ‘bottom up’ innovation over many of the ‘top down’ attempts to impose ‘one-size’ fits all.
Gavin”

[I would add that I believe the appropriate summary of Adam Smith’s stance of the great divide between competitive markets and politically-directed States is: ‘markets where possible and states where necessary’, bearing in mind that markets are not always possible and states are not always necessary, as Smith showed in Wealth Of Nations.]

My Debate About Chomsky on Adam Smith Re-Opens

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I received a comment on a post I made, 5 May 2009, in relation to something posted in the Alerts about Professor Chomsky’s views (see the Archives on the right-hand column to find the original post – go to 2009, and then trawl through ‘May’). Here is the one of three posts from me at that time about Chomsky’s views on Smith:

The Original post:

“Not Sure About Chomsky's Version of Adam Smith”

“Noam Chomsky: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits."

My initial Comment:
Let me say first that Noam Chomsky is respected as a formidable intellectual with a lot of ‘hinterland’ as we say in the UK, and he says quite a lot about Adam Smith that you won’t find from many modern economists, because, as he says, few of them actually read Smith’s books. But if you put up this line of argument it is best if you show that you have read Wealth Of Nations well.

That he confesses he ‘read him’ but didn’t do ‘research’ is revealing and perhaps explains why his interpretation, given with that certainty that comes from a certain kind of intellectual bully, is actually misleading on the issue of Adam Smith and the division of labour, a common enough error among most of the Left.

Smith was a moral philosopher; he observed everything but did nothing. He didn’t bring to his work a preconceived set of prescriptions and apply them to his study of commercial society in the context of 18th-century Britain. He described, taking the long-view of history, as well as his reading about and visiting fairly primitive work places to see how the division of labour increased labour productivity. And not just in the pin factory (‘a very trifling manufacture’; p14). He also, and perhaps of greater significance, he described the ‘accommodation of the most common artificer or day labourer in a civilised and thriving country’ (p 22). Here he described the long supply-chain, including its international dimensions that produced the common labourer’s ‘woollen coat’, the ‘produce of the joint labour of a great multitude of workmen’.

Yes, the national and international division of labour is ‘wonderful’. It operated in Smith’s day without ‘central planning’, ‘central direction’, and without the help of university professors from either Glasgow (1461) or Harvard (1636), or the sovereigns of any kingdom, or legislators and those who influenced them, in the few places where they existed.

Having discussed the division of labour and its commercial consequences in Book I of Wealth Of Nations (it created, among other things, the wealth that enabled Scotland and British colonies in North America to divert some portion of their ‘annual output of the necessities, conveniences, and amusements of life’ to the employment of professors to educate young men – no girls! – to add to the human capital of what were for many decades (in Scotland, for centuries) humans otherwise bereft of learning and sunk in ignorance.

Chomsky notes: ‘But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.’

Now, some parts of this sentence are fine, some parts woefully wrong, and almost all of it out of historical context. I have no idea how a Harvard professor managed to attack those who ‘read the first paragraph of The Wealth of Nations’ but do not ‘get to the point hundreds of pages later’ (768 actually), and yet manifestly misleads his readers as if he hasn’t read Book V himself with the due care and attention we expect from Harvard undergraduates, let alone its senior faculty.

The relevant section reference is ‘Article ii’, ‘Of the Expense of the Institutions for the Education of Youth’, pages 758-88, of Book V of Wealth Of Nations, and the relevant page is 782 (from the Glasgow Edition, Oxford University Press):

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (WN V.i.f: 782)

The education of youth is a long and important part of Wealth Of Nations. In it Adam Smith presents a detailed description of the history of education from classical times to its then state in Britain. The first notable feature was that only boys were formally educated for a few years; girls were left to their parents to ‘home educate’, which for the majority meant no education at all (their parents were likely to illiterate and general ignorant).

Across Britain the picture was patchy. England was largely backward educationally. It had two universities, Oxford and Cambridge, but local schools were rare. In Scotland, there were four universities, Edinburgh, Glasgow, St Andrews and 'Aberdeen'. But local provision for education since the 17th century was managed by ‘little schools’ in most parishes, paid for by a mixture of charitable sources, local contributions and donations. Most male children spent a year or more, some ‘bright’ children up to age of 14. Middle class boys tended to stay longer than the children of the poor, most of whom were sent to work from about 8, their parents near destitute.

Smith describes this in Book V. In fact, he offers the ‘little school’ system in Scotland as suitable for England too (a much larger country in population and wealth than Scotland). He envisages all children spending some time learning the ‘read, write and account’ to extend literacy across the majority of children (he left open the question of education for girls, but clearly they could be accommodated in the ‘little school’ system).

Book V is about government expenditure and revenue. How was education to be funded? The government would have to play a serious role in such a project, which meant taxation of a relatively narrow taxation base. At the time taxation was a sensitive subject (it was ever thus) and the people who would have to consent to such an additional expense (‘little schools’ would need to be built, which with 60,000 parishes was no mean line item in a budget) were the legislators, mainly representative of the agricultural aristocracy and few ‘improving’ landlords.

If Chomsky re-reads the paragraph quoted above he will note two themes in his argument. The first, which Chomsky has focused upon, is that of the deleterious effects of the division of labour, which were of longstanding antiquity (the division of labour preceded commerce by many millennia back into pre-history).

Farm labourers were marginally ‘better off’ than the fewer primitive factory labourers, hauliers, seamen, servants and soldiers, and etc. But be clear, the outdoor farm labourers were not all dancing round May Poles and living as happy families on the prairy. Theirs was a hard life, short too, with infirmities and early deaths from disease, incapacity, accidents and starvation.

Into this background Smith raises the ‘man whose whole life is spent performing a few simple operations’ and the consequences in his stupidity and ignorance. He does not raise the spectre of millions living their awful rural lives in similar terms – his appeal is to support from the few rich men who owned the farms.

He also turns his argument neatly as his second theme. If the sources of finance for education (mainly the aristocrats) were not inclined to support the ‘little schools’ from their usual selfish inclinations to prodigality, then it would be useful to appeal to their fears of disturbances to their sheltered lives – the steady decline in martial prowess of the uneducated mass of poorer men (and Smith knew how to write well).

For the indigent labourer whose ‘torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life' could be written as a major threat lurking everywhere. Moreover, ‘Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war.’ If not inclined to rebellion, his services in defence of the island country could be useless.

These concerns were meant to strike a chord with that class of taxpayers who were fearful of weak armies and of easily misled labourers who might become rebellious (such rebel ‘mobs’ had forced the British army out of the colonies).

In short, Smith was 'spinning', as we say today, a case for increased taxation to pay for public institutions regarded as deficient in 18th-century Britain. That he was doing so 768 pages after the ‘pin factory’ was deliberate, Few of his readers would have the faintest idea of what went on in a factory and his prose was powerful because it pushed all the right buttons to rouse the rich readers from their complacency – and not a little hostility – about the plight of the children of labourers.

Chomsky has not considered this context. Hence, he can decry the division of labour and assert with conviction that it ‘will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be’, but not with much credibility. He apparently has no idea of how ignorant were the members of the majority of ordinary labouring families in the 17th and 18th centuries, let alone the millennia before then.

Empirical evidence beats speculation. Was the result of the division of labour, even through the horrors of the industrial revolution of the 19th century, a nation of people who were turned into ‘creatures as stupid and ignorant as it is possible for a human being to be?’

When Adam Smith wrote Wealth Of Nations (1764-1776) he did not have a vote under the existing franchise – in fact he never had a vote – but by the late 19th century, literacy levels were at unprecedented higher levels, ignorance was not the norm, and trade unions were beginning to exercise their functions, and were led by working men who could do a lot more than ‘read, write, and account’.

By exaggerating his case with colourful prose, few facts, and no history Chomsky undermines those parts of his case that are worthy of our attention.”

“J. Young’s” comment posted this week:

"Perhaps in not having read any previous or subsequent articles on this topic by you, I seem to have missed your point. 

Here's a portion of what Chomsky said:
… “But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.”
 Smith's logic, similarly, was that the division of labor, if taken to the point of absurdity, would lead humans to become “as stupid and ignorant as it is possible for a human creature to become.” Smith then began to discuss the government's role in a semi-socialized educational system. 

I'm not too sure I understand that these points are in conflict. Chomsky never said anything about the abolishment of the division of labor; though, you're seemingly arguing that he had. Nor did Chomsky ever insinuate that Smith's logic was that of socialism. Nor did Chomsky say that capitalism should be abolished. He simply outlined the fact that his form of liberalism is similar to that of Smith. 

What Chomsky is arguing against, as he always does, is the illogical authoritarian-esque conclusions of what is currently referred to as neoliberalism—an ideology which Adam Smith is often propped up as a hero for. Chomsky, as he has done clearly and consistently throughout the years, is simply saying that the underpinnings of neoliberalism are more closely related to notions of empire and domination, than to the ideals expressed by Smith. And that Smith is only being used a a rhetorical device by neoliberalists to foster adherence to an illogical ideal that Smith would likely oppose. 

You're argument is that Chomsky misinterpreted Smith, though you never say why or how—you only provide a mental-gymnasium of literary deconstruction on Smith's work. I don't think anybody is arguing that the division of labor is anything besides an obvious feature of human-kind.”

My response:

The key to J. Young’s (and Chomsky) missing of Smith’s point comes from not reading Wealth Of Nations Book V properly. Chomsky paraphrases what Smith actually wrote as: “the government is going to have to take some measures to prevent division of labor from proceeding to its limits.”

Nowhere does Smith make such an absurd suggestion. His whole point in returning to the division of labour in Book V is make clear to his readers (mainly the well-off who could read and afford his book) that government should “takes some pains to prevent … the state into which the labouring poor… must necessarily fall”. From which Young in an absurd interpretation takes to mean that government should prevent the ‘division of labour’!

On the contrary, Smith’s argument in Book V is about the need to take specific (and, incidentally, expensive) steps to eradicate the deploring lack of education in 18th-century Britain among the labouring poor. It was not a fictitious wish for an end to the division of labour - from which people in improved commercial society had gained so much – Smith details how “industrial and frugal peasants” were so much better off as a direct consequence of the division of labour than “many an African king, the absolute master of the lives and liberties of ten thousand naked savages” (Wealth Of Nations, Book I, Chapter 1, pages 23-24).

Smith’s was a practical policy for thousands of ‘little schools’ in each parish (all 60,000 of them!) to ensure their intellectual development as the best antidote to “gross ignorance and stupidity” among the “inferior ranks of people”. He made his plea for education being supported by government and the taxes of richer citizens, and their charity, by raising fears they would likely to respond to, namely the fear of disorder occasioned by mobs of avoidable illiteracy and ignorance:

“the state, however, derives no inconsiderable advantage from their instruction. The more they are instructed, the less liable they are to the delusions of enthusiasm and superstition, which among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people are always more decent and orderly than an ignorant and stupid one. … In free countries, where the safety of government depends very much upon the favourable judgement which the people may form from it conduct, it must surely be of the highest importance that hey should not be disposed to judge rashly or capriciously concerning it.’ (Wealth Of Nations, Book V.i.f.61: page 788).

I commend to J. Young that he read the original text by Smith and not a poorly paraphrased version of it by a highly politically-mind source such as Chomsky, who read “snippets of Adam Smith, the few phrases they teach in school”, and cannot even quote properly the ‘snippet’ he does read.

How Not to Avoid a "Black Vortex"

Brooke Crothers interviews Andy Grove, co-founder of Intel. He writes for
CNET NEWS (HERE):

“Intel's Andy Grove on manufacturing in America”

“U.S. businesses "follow the invisible hand. And the United States follows the black vortex into the abyss, as a result," he continued. U.S. businesses "just follow their own optimum outcome."

Comment
If leading manufacturers act or rely on the myth of ‘an invisible hand’, I fear for the decisions they might make when believing that there is an actual invisible hand leading them and others into the very “black vortex into the abyss”, that Andy Grove prefers to avoid.

A Review of Ian Simpson Ross, The Life of Adam Smith, 2010 (2nd edition): Part 2: Early Years

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Gavin Kennedy

The preface to the second edition contains this paragraph from Ian Ross:

“If Smith is one of the inventors of the modern world, what kind of nightmare did he bring upon us? Alternatively, if he did inquire successfully into the origin of wealth and how it is constituted, why is his message so badly misunderstood and misapplied? Well, the story of his life and books tells us he was very far from being an optimistic promoter of market fundamentalism. He accused himself of having a ‘melancholy and evil boding mind’, and denounced ‘prodigals and projectors’ who sought to enrich themselves at the expense of others, with schemes that mingled folly with knavery. He was suspicious of governments, and equally so of merchants and manufacturers scheming to deceive the public by cornering the market or engagement in other malpractices. He believed that fair and lawful competition in the market would lead to fairness in compensation or producers, as well as fair pricing for consumers, everywhere in the world, not just in domains favoured at the expense of others. It seems to me, also, he would esteem the idea emanating from Ludwig Erhard and others in the post-World War Two era, about nations endorsing the social market based on free and fair competition, going along with responsible provision for a safety net for health care, pensions, and unemployment insurance.

He was outraged by the practice of slavery, especially in Africa, and I think he would be very concerned about the continent’s suffering from sickness, hunger, internecine war, and environmental damage, and how best to overcome this. Perhaps he would recognize in the current debate over international support – represented for example, by Dr Dambisa Moyo’s challenging book, Dead Aid (2009) – some elements of his own thinking, namely, that charity is not the answer to social, economic, and political malfunction, and that large capital inflows to distressed countries seem to correlate with diminished government accountability. Dr Mayo counsels that development funds should be raised on the financial markets through bond issues, with governments accountable to investors and to their citizens, who would pay taxes to clear the interest charges on the bonds. This may be an oversimplification of a very complex situation, however, and Smith would have been interested in alternative ways suggested for promoting development: assistance through ‘peacekeeping, security guarantees, trade privileges, and governance’ (Paul Collier. ‘Review of Dead Aid’, the Independent, 30 January, 2009)”. [Ross, I. S. Preface to the Second Edition, pp xix- xx].”

I open this review with these considered views of Ian Ross from his preface to the second edition, based on his long academic career as a scholar in 18th-century history. For some readers these ideas will be anathema to their own beliefs about what Adam Smith was about in publishing his two books, Moral Sentiments and Wealth Of Nations.

Given that most economists who regularly quote from Wealth Of Nations do not appear to have read it, because they rely on what they heard in their undergraduate classes some decades ago and supplement their vague memories of their tutors’ certainties with well-used quotations from journal articles written by others who also have not read him either, let alone a vast media presence that churns out the same quotations, torn from their original context, or just plain invented by so-called authorities, it is not surprising that ideological myths and other ‘harmless’ nonsense are so prevalent today.

Attend any academic conference, across several disciplines, besides economics, where Adam Smith is cited, or tossed into the discussion, or, indeed, where his Work is the main subject of the gathering, and be prepared to hear or read much that is at variance with what you will find in Ian Ross’s “The Life of Adam Smith”. There is a kaleidoscopic array of ‘Adam Smiths’, who never graced the streets of Kirkcaldy from 1723 to 1737, Glasgow from 1737-1740, Oxford from 1740 to 1746, Kirkcaldy and Edinburgh from 1746 – 1751, Glasgow from 1751-1764, France and Switzerland during 1766, London from 1766-67, Kirkcaldy from 1767-73, London from 1773-76, Kirkcaldy from 1776-78, Edinburgh from 1778-90 (Panmure House) (Smith, Correspondence, 1977, 1987). Among the many notorious examples of other ‘Adam Smiths’ we have the ‘Smith’ who was around MIT (Paul Samuelson, 1948) and later was ‘alive and well’ in Chicago (George Stigler, 1976).

Ian Ross, The Life of Adam Smith, is the timeless antidote to the multifarious ‘Adam Smiths’ invented (this not too strong a word for it) by some senior and otherwise distinguished modern economists in North America in the last half of the 20th century.

Ross opens with an account of the background to Smith’s family in Aberdeenshire and Kirkcaldy. This takes us into the major issue in Scotland at the turn of the 17th-18th centuries – the conflicts over dynastic-succession, with the side-issue of religious strife between Catholics and Protestants, between the ‘Jacobites’ supporting the Stuart kings versus the Hanoverian line of kings that replaced them (William and the Georges I to III), which rumbled on in Scotland to the bloody defeat of the mainly Highland armies at Culloden in April 1746 (and its disgusting, violent and merciless aftermath).

The religious causes of strife were the ever-present background to the controversial Union of the parliaments of Scotland and England in 1707, and its dire consequences in Scottish civil society while Smith grew from sickly child to university student and professor, in the home of his beloved and widowed mother, Margaret Douglas Smith. His father, also called Adam Smith died in January 1723 (he wrote his will in November 1722 and probably knew he was dying, perhaps also that his wife was pregnant). Baby Adam was born on or about 6 June (when the records show he was baptised).

Ian Ross, quite rightly, uses the dates as they ware recorded on all documents under the old calendar, which I find re-assuring because it rejects implicitly an unwelcome fashion that has appeared recently in some quarters to 'modernise' all dates before the great calendar change of 1751 by 11 days, which is a source of avoidable confusion. The dates in the extant documents should be left as those given by those wrote them. It is better in my view to jump ahead in 1751 by 11 days, supported by a single footnote, rather than pretend to rewrite all the thousands of dates on the hundreds of thousands of original documents, with confusing 11-day variances in everything recorded before 1751.

Ross trawls widely around Adam Smith’s early years at school and university to give an authoritative account of the milieu in which young Adam grew up and the early influences on him and his thinking. Several of his early influences in personnel continued to have strong relationships with him as kin, or mentors, and as fellow members of what is now known as the Scottish Enlightenment. He grew up and was educated in what was a scholarly fraternity upon which the Enlightenment took root across Scottish, English and French society from the 1750s. Reading Smith’s famous books without knowledge of this context is a rather barren feast, but Ross provides a bounteous remedy .

The growing ‘improvement’ in local farming – Smith’s relatives on his mother’s side were noted landowners – and a small but active commercial presence, supported by the small harbour in Kirkcaldy, provided evidence of the nascent changes taking place in the local, and, by extension, in the Scottish economy. Interestingly, Smith visited a near-by ‘naillery’, which may be the one to feature in his discussion of the division of labour in Wealth Of Nations and earlier in his Lectures On Jurisprudence.

Two other influences on young Adam were school and religion. School was the ‘sturdy, two-room building of the burgh school’ built in 1723, the year he was born. His teacher was David Miller, from whom he learned to read Latin and the rudiments of Greek, and elements of good English. These subjects had a distinctive and lasting influence on Smith. Ross reports on his mother’s religious influence (she was by all accounts a very religious person), and saw to his introduction to Calvinist theology of the Moderate Presbyterian strain.

Both school and home provided him with traits that were to last a lifetime. He ‘was well prepared intellectually for his student years and [for] finding a vocation as a moral philosopher and man of letters during the stimulating ere of his country’s history, marked by a determined drive for improved performance in agriculture and other economic sectors. Most important of all, his form of Presbyterian inheritance, together with the rudiments of training in the Latin classics, apparently instilled in him the values of a frugal lifestyle, self discipline of a stoic cast, diligence in his calling, and strict justice towards others tempered with benevolence which characterised his actions and his teaching. At the same times, it should be acknowledged that there were elements in the religious culture Smith encountered that could be oppressive in Kirkcaldy and restrictive…’ (p 37).

How these influences panned out is clearly identified by Ross in what follows.

A Review of Ian Simpson Ross, The Life of Adam Smith, 2010 (2nd edition): Part 1: Introduction

A review: Ian Simpson Ross, “The Life of Adam Smith”, Oxford University Press (2010).

Part 1: Introduction

Ian Ross, “The Life of Adam Smith”, without doubt is recognised as the definitive account of the life and times of Adam Smith. The new second edition, published in September 2010, will ensure that Ross’s account in unlikely to be surpassed for decades to come.

The first biography, "An Account of the Life and Writings of Adam Smith, LL.D" was published in 1795 by a contemporary who knew him well, Dugald Stewart, Professor of Mathematics and then Professor of Moral Philosophy at the University of Edinburgh, who also knew many of Smith’s contemporaries too (Dugald’s father, Michael Stewart, was a fellow student with Smith at the University of Glasgow and Professor of Mathematics at Edinburgh). It remained the most commonly known account of Smith’s life until the end of the 19th century when John Rae published his “Life of Adam Smith” in 1895. William Robert Scott, carefully using the archives on Smith held at Glasgow University, published “Adam Smith as Student and Professor” in 1937. The aforementioned three authors and their books constitute the serious sources for Smith’s biographical works before 1995, when Ian Ross published “The Life of Adam Smith”.

Should new materials emerge, such as missing letters, and lecture notes, presently lying neglected in dusty and forgotten archives, all students of Adam Smith’s legacy would warmly welcome them. It is my hope that if and when the lofty powers that decide such things, give the go-ahead to Edinburgh Business School (Heriot-Watt University) for the renovation of Panmure House, Smith’s Edinburgh home from 1778 to 1790 (presently awaiting planning permission from the Scottish Government), the very existence of such a dedicated research centre will become widely known as the obvious place for the safe-keeping of any newly discovered letters to or from Adam Smith and other relevant materials that may be found.

Lecture notes by Smith’s students were discovered in 1896 in Oxford and Aberdeen in 1953 and various letters have turned up too. While the likelihood of there being many more unknown items to be discovered diminishes each year (Smith ordered from his death bed his private and unpublished papers to be burned), but something new and exciting may yet turn up. In the past three years, I know of two donors who offered their copies of Smith’s first editions of Wealth of Nations and Moral Sentiments to a relatively obscure charitable library in Scotland and to a private Edinburgh bank. If Panmure House had been well on the way to its needed and sympathetic renovation, instead of languishing in a planners’ limbo, and thereby available, I am sure a case could have been made for Smith’s former home acting as their trustee for their safe keeping and widespread, but secure, scholarly access. Panmure House is quite independent of public funding or private commercial interests.

Working with whatever scarce materials that we have is a major undertaking. That so much is written about what Adam Smith meant, and means today, by writers who, frankly, are ill-equipped in a basic knowledge of his life and Works, let alone his biographical details, is practically inexcusable, given the four serious biographies published since 1795 (now added to by a fifth excellent work, that of Nicholas Phillipson’s, “Adam Smith, an Enlightened Life”, published last month (and reviewed last week on Lost Legacy). That is why Ian Simpson Ross’s “The Life of Adam Smith” is of such importance: it set, and continues to set, the standard by which all other biographies of Adam Smith must be judged. Ross is the arbiter of scholarly authority on the details and themes of Adam Smith’s life and Works.

For this reason, Lost Legacy will provide my reader’s review of Ian Ross’s scholarship over the next few weeks (at least within my modest abilities). I shall raise questions, not normally raised, which have occurred to me since reading the first edition, and try to answer them as honestly as I can. I shall point out the lessons that appear to me to be fundamental to Smithian scholarship that point to the excellence of what Ian Ross has done, and why all serious scholars – and perhaps a few epigones too – should read carefully his “Life of Adam Smith”.

A Malaysian Economist On the Invisible Hand

Hishamh, an applied and practicing economist in the Malaysian financial sector. writes on Economics Malaysia writes the Economics Malaysia Blog HERE:

“I’m not a free market fundamentalist, nor do I believe in the doctrine of self-correcting markets. To me, market failure is as likely an outcome as well-functioning markets – we are after all dealing with human beings who are fallible. There is no “invisible hand” that infallibly guides markets to the first-best outcome that maximises social value and welfare. On the other hand, the market mechanism is infinitely superior to the alternatives – so in that sense, [Former prime minister Tun Dr Mahathir Mohamad ] has it right. Markets need regulation to ensure that they remain efficient and fair.”

Comment
Hishamh is right on his assessment of the so-called ‘invisible-hand’ myth that has entrapped its believers among modern economists. Incalculable harm has been created by this gross distortion of Adam Smith’s use of this particular metaphor.

Markets are very visible – they would not work if they were invisible!

Whether markets would work without the rule of law, justice and competition is highly debateable. While libertarian in outlook, I am not an anarcho-libertarian. (Liberty is more important than democracy.)

I think we should be pragmatic in all things. ‘Men of System’, as Adam Smith called them, are dangerous meddlers, whether peddling so-called laissez-faire or statist-interventionist.

Much more sensible – and safer – to advocate and practice ‘markets where possible, state intervention where necessary’, which I believe is closer to Adam Smith’s legacy.

Peter Kinder Discovers the Truth About Adam Smith's Use of the Invisible-Hand Metaphor

Peter Kinder in The Bell Blog writes on “Adam Smith’s ‘Invisible Hand’ & Today’s Need for Protectionism”, HERE:

“At one time I thought the phrase referred to the Deists’ notion of God. It certainly can’t refer to ‘the market’. For one thing, Smith doesn’t use the word within pages either side of his immortal phrase. And, he’s not talking about the merchant’s competitors or customers.

Rather, Smith answers his own question about why a merchant in his own self-interest will favor domestic over foreign goods, all things – presumably including quality as well as price – being about equal. Smith equates self-interest with that of the merchant’s society. Therefore the hand in question is much more likely that of an inner witness.”

Comment
Congratulations to Peter Kinder for getting closer to the truth about what Adam Smith meant by his use of the invisible-hand metaphor. I agree with Peter Kinder: the invisible hand metaphor in Wealth Of Nations (Book IV) was not about the market, which Smith detailed his views upon in Books I and II.

The motivation of the traders who preferred “domestick industry” to “foreign industry” was the perceived “security” of their capital, which Peter Kinder denotes as "an inner witness" i.e., subjective and not a mysterious "invisible hand', which was a metaphor, not a real entity leading people externally.

By preferring “domestick industry’ they were led by their insecurity to add to domestic “revenue and employment”, a purely quantitative outcome, which in Smith’s view was beneficial because it spread the benefits of “opulence”, especially to the “poorer majority” (pages 45-56, WN).

This idea , especially after the 1940s, was transformed by modern economists to the market (see Paul Samuelson, “Economics: an analytical introduction”, 1948, page 36, plus 19 editions and 4 million plus sales) into a much wider myth than Adam Smith’s, such that Samuelson transformed the perfectly reasonable unintentional consequence of the merchant's insecurity into even ‘selfish” motives that “benefitted society”, a wholly ludicrous proposition if it came from Smith, a moral philosopher. Such ideas about selfish ends were derived from modern readings of Mandeville (1724), whom Smith considered “licentious” (see Smith’s “Moral Sentiments, Part VII, 1759).

Needless, to say, perhaps, I do not agree with Peter Kinder’s stance of favouring protection. (And neither would Adam Smith).