Wednesday, June 30, 2010

On The Mend

Hi Colleagues

I am slowly recovering at home.

Lost Legacy is neglected, but thanks to those that passed on their good wishes.

Just as soon as I am able I shall resume posting regularly – I miss the daily exchanges.

Currently, I am (slowly) re-reading David Tandy’a excellent ‘Warriors into Traders the power of the market in early Greece’, California University Press, 1997. On my first read some years ago I missed quite a lot of the detail.

It has often struck me that modern science, especially Marxists, have neglected the influence of commerce on development from the earliest times. Tandy’s focus was on 8th-century BCE Greece, yet reading Marx carelessly, nothing really happened until mid-19th –century ‘capitalism’ (see also Polanyi, 1944).

Smith placed the earliest propensity to exchange relationships with acquisition of speech (WN I.i.), which pre-dates even Greece, and the influence of bargaining is evident in all manner of forms (including language development!). The market preceded what we call ‘capitalism’ and took many forms. Even simple use of money presumes exchange relationships – and the Roman armies marched with their coins in their bags.

My family are helping complete the reading of the proofs of the paperback edition of “Adam Smith: a moral philosopher and his political economy”, Palgrave Macmillan, 2010, priced at the ‘give away’ price (thank you Mr Palgrave) of £18.99! I took the opportunity to add some new material to the hardback (price £65).

However, I missed the University of Richmond’s (Virginia) Summer Institute which had promised to be of the usual high standard, where young scholars and old hands met on all aspects of the history of our discipline. My own paper on Paul Samuelson’s key role in spreading the myths about Adam Smith and the ‘invisible hand’ gave the details of how he linked the innocent metaphor to the welfare theorems, without any basis in historical fact ,through the immense influence on undergraduates and their tutors (many of whom became tutors in due course) of his excellent textbook Economics: an introductory analysis, 1948, McGraw-Hill (4½ million sales, plus used copies re-sales) and 19 editions to 2010.

I shall come back in due course; the above took nearly an hour to type (plus re-typing) and I am tired now.

Gavin

Wednesday, June 23, 2010

Announcement XXIII

Gavin has returned home from hospital but is very tired just now. He expects (hopes) to try blogging in a day or so.

Meanwhile, his book "Adam Smith: a moral philosopher and his political economy, 2008", Palgrave Macmillan, is in press to be published in September, prices at £18.99

Beatrice (his other daughter)

Monday, June 21, 2010

Announcement XXII

Gavin is still recuperating in hospital, but will be back blogging by the end of the week! Don't miss it, he has a lot to catch up on.

Florence
(Gavin's daughter)

Saturday, June 12, 2010

Announcement XXI

Gavin is currently in hospital and unable to blog, but he'll be back as soon as he is able. Hopefully by 20th June.

Florence
(Gavin's daughter)

Wednesday, June 09, 2010

A Blogger Re-reads Adam Smith's Definitive Biography


IMPORTANT NOTICE

ADAM SMITH’S LOST LEGACY HAS BEEN MOVED BY “BLOGGER”, THE HOST SITE, TO A NEW ADDRESS:


TO FOLLOW ALL 2083 POSTS (AND COUNTNG) FROM HERE TO 2012 AND BEYOND, PLEASE USE THE NEW ADDRESS.

THANK YOU

Gavin Kennedy



Kenneth Anderson writes the Volokh Consipiracy Blog HERE and posts:

Mallaby on Soros and the Pound, and Some Other Summer Reading in Philosophy and Economics"

“The latter goes to my scholarly interest in what I have called the “moral psychology of finance,” and somtimes called “virtue economics” — not in the sense of distributional justice in the economy, but instead the Aristotlean sense of “virtue ethics” and its intersection among practical reason, attitudes and rationality, and affective behavior and rational choice. I am slowly re-reading Theory of Moral Sentiments, alongside Ian Simpson Ross’s exemplary Life of Adam Smith, a book I read with insufficient attention when it first appeared, but which I am re-reading with a great deal of care
.”

Comment
A good sign from Blogland.

The more that those interested in modern economics read about figures, like Adam Smith, from impeccable sources, such as Ian Simpson Ross’s excellent and, in my view definitive, biography of Adam Smith, the more likely we are going to see a re-appraisal of historical figures who have been captured by people with modern perspectives rather than what they actually wrote and contributed.

Note: A new, second edition of Ian Ross’s Life of Adam Smith, is due from Oxford University Press soon.

Last year, when he visited Edinburgh and I showed him round, and the plans for the sympathetic renovation of, Panmure House in Edinburgh, where Adam Smith lived from 1778-90, he told me that his new edition was about to be sent to the publishers.

I await an opportunity to re-read the book and catch-up with his latest thoughts.

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Tuesday, June 08, 2010

Circular Arguments are No Argument

Ravi Nagarajan, a private investor, writes for Gurufocus news HERE:

Lowenstein’s ‘The End Of Wall Street’ Examines The Financial Crisis

‘While the quant wizards who came up with various permutations of synthetic CDOs did in fact “create nothing” of economic value (other than generating fees), traditional investment banking helps match investors with real companies making real products and employing real individuals. Investors who allocate capital to businesses are, in aggregate, a vital part of Adam Smith’s invisible hand. This brings about an interesting observation regarding value investing as a contrast to Gordon Gecko’s famous quote. Value investors, by allocating capital intelligently with a long term orientation, are in fact contributing to the well being of our economy. They obviously do so with self interest in mind, but in the process, optimize economic outcomes.


Comment
Yes, but Ravi, what exactly does the so-called ‘invisible hand’ actually do?

You offer a circular argument: ‘intelligent’ investors, acting on their ‘self-interest’, defined as taking a ‘long-term orientation’, contribute to the ‘well being of our economy’. Fine.

But what of the rest? What or Who guides them? Don’t they also act in their self-interest as they see it?

If they play no part in “Adam Smith’s invisible hand”, because their actions are overcome by the other players, not playing a part in the invisible hand, what relevance is there to the so-called invisible hand?

Do we only know about the invisible hand working after the players have acted and those who act in a certain manner have their actions retrospectively credited to the invisible hand, how may we describe their actions as being ‘led by an invisible hand’ (WN IV.ii.9: 456)?

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Monday, June 07, 2010

Two Japanese Economists Correctly Interpret Adam Smith's Use of the Invisible Hand Metaphor

At last!

Two modern economists discover the truth about Adam Smith's use of the metaphor of 'an invisible hand'. I refer to two Japanese economists, Ayumu Yasutomi, Institute for Advanced Studies on Asia, University of Tokyo and Charles Yuji Horioka, Institute of Social and Economic Research, Osaka University, and National Bureau of Economic Research, in their short paper:

"ADAM SMITH’S ANSWER TO THE FELDSTEIN-HORIOKA PARADOX: THE INVISIBLE HAND REVISITED"

Abstract

"In this paper, we show that Adam Smith pointed out the existence of the Feldstein-Horioka Paradox or Puzzle and even gave an explanation for it more than 200 years before the publication of Feldstein and Horioka (1980). Smith argues that it is the pursuit of their own security that leads owners of capital to invest their capital in their own country to as great an extent as possible and that it is the pursuit of security rather than the pursuit of profit that leads individuals to promote the good of society as a whole via the “invisible hand.”

Thus, Smith argues that it is the owner of capital’s concern about her own security, not her concern about the rate of profit, that leads her to invest her capital domestically to as great an extent as possible.

Note, moreover, that, contrary to common belief, this is the only usage the term “invisible hand” in the entire book. Thus, Smith argues that what leads individuals to promote the good of society as a whole is not the pursuit of profit but the pursuit of security! And it is this tendency toward risk-aversion and the dominance of this tendency vis-à-vis the tendency to pursue profits that causes capital to be immobile between countries
."

Comment
Ayumu Yasutomi and Charles Yuji Horioka have got it right.

They have read the relevant passage in Wealth Of Nations, with greater care than many contemporaries (congratulations!) and correctly diagnosed the avoidable problems attributed to Smith's use of the invisible hand metaphor: it was not a 'magical' diagnosis of a new, but still undefined fore in the workings of a commercial economy;in Smith's case it was about the risk-aversion, or security concerns of some, BUT NOT ALL, merchants leading them to invest locally instead of abroad, that on the arithmetic sum of the parts contributing to the whole of domestic national production and employment.

You can read Ayumu Yasutomi and Charles Yuji Horioka's short article HERE

Read it and pass it on to colleagues - post it on your Blog, if you can.

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Sunday, June 06, 2010

Announcement XX: Back to Business

I arrived home in Edinburgh on Saturday evening and I am now back online (a plug-in and a switch pressed - if only it was so easy in France...).

En route here, I trawled through Marshall's Principles (the so-called 'volume 1, which turned out to be the only volume) and uncovered some forgotten pieces on Adam Smith, which I may discuss in a future post.

Marshall posted an 'appendix' on the history of economic thought which reads like those parts of the Wealth Of Nations, but with a wholly unSmithian dash of Germanic race-theory and a touch pf British imperialism of the 'Northern' origins of civilised man, moving southwards from the cold regions to displace where it could not reform the weaker races of the hotter climes.

While away, I wrote some examination questions and solutions for my old day job at the Business School, which I shall tidy up an send in for exams in 2011 and 2012.

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Friday, June 04, 2010

Announcement XIX

I return to Edinburgh today for three-weeks during which I have a course to attend in London and one in the University of Richmond, Virginia, Summer Institute, before returning to France 26 June until early August.

It is expected that I should be back on-line on Sunday, and hopefully during the events in London and the US.

Please be patient. These disruptions are unavoidable.

Gavin

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Thursday, June 03, 2010

On the Genesis of the Invisible Hand Myth from the 1950s No. 11

Edwin G. Dolan (with the collaboration of David E. Lindsey), 1977. Basic Economics. Hinsdale, Illinois: The Dryden Press.

The principle of market coordination uses the price system as a source of incentives. Coordination takes place without explicit central control. S Adam Smith wrote some 200 years ago,

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. … Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. … By directing that industry in such a manner as its produce may be of the greater value, he intends only his own gain, and is his in this, as in many other cases, lead (sic) by and invisible hand to promote and end which was no part of his intention

There are large areas of the division of labour, however, which do not depend directly on the “invisible hand” of the market as a means of coordination. Hubcap fitters do not perform the their job in response to market signals, It is not their business to judge that their skills are more profitably employed in fitting hubcaps than running a milling machine in another part of the factory. Instead they fit hubcaps because their immediate boss tells them that is what their job is today. Here we are in the realm of a different coordinating principle altogether, that of managerial coordination’
(p 328).

Comment
The two paragraphs Dolan quotes from Wealth Of Nations are over 400 pages apart. The ‘Butcher, brewer, and baker’ quote is from Book I (p 26) and the ‘invisible hand’ quote is from Book IV (p 456). Others have followed this presentation by the same device, without mentioning their separation, thereby spreading the illusion that Smith intended their twin significance.

However, Dolan goes on to say that coordination by the invisible hand is not the sole form coordination by referring to an example of ‘managerial coordination’ and the work of Ronald H. Coase (‘The Problem of Social Cost’, Journal of Law and Economics, 1961).

My copy of Basic Economics was sent to me by the publisher with a view to using it in the first year class but I had moved onto the second year class by then. I did, however, use Dolan’s earlier short book (Tanstaafl [there ain’t no such things as a free lunch]: the Economic Strategy for Environmental Crisis. 1971. Holt, Reinhart and Winston ) as a brief introductory read for the class (many of whom had not done economics before and were interested in something they considered relevant to the themes of the time). It proved popular and even today, 30-40 years later, I still meet former students, who are now in professions and senior jobs, who re-introduce themselves to me with their memories of ‘Tanstaafl’.

I wonder how much the idea of ‘unintended consequences’ influenced Dolan in his reference to the invisible hand was sparked by ‘The Foundations of Modern Austrian Economics’ (1976), which he edited the year before his Basic Economics came out in 1977. Austrian economists tend to be relaxed about the historical inaccuracies of linking “Adam Smith’s Invisible Hand” to modern uses, seeing the former as a progenitor for their enthusiasm about ‘unintended consequences’.

You can read Dolan’s Bog HERE:

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Wednesday, June 02, 2010

On the Genesis of the Myth of the Invisible Hand, no. 10

H. A. Silverman, [1922], 5th: 1928; 11th: 1940; 16th 1964. The Substance of Economics: for the student and the general reader, London: Pitman & Sons Ltd.

Herbert Albert Silverman (1896-), a lecturer in economics to the University of Birmingham and for the Workers Educational Association in the 1920s and the 1930s, wrote several basic business, economics, industrial organisation and taxation textbooks in the 20th century.

The interesting aspect of Silverman’s work for Lost Legacy is that in the 1928 edition the sole reference to Adam Smith in the main text is in respect of a discussion on the Labour Theory of Value, which reflected the interest of his likely readers (not your typical middle-class university undergraduates in the 1920s; more the educated workers and clerical students seeking their education part-time in Extra-Mural Classes offered by universities and ‘technical colleges’. From the trade unions and the ‘new’ Labour Party the Marxist challenge to capitalist economics influenced the choice of syllabi.

However, the 1928 edition of Silverman contained an Appendix, ‘The Development of Economic Thought’ (pp 321-36), which under the sub-heading of ‘The Modern Period’ has a reference to: Adam Smith and the ‘invisible-hand’:

In order to get a proper view of Adam Smith’s teaching, it is necessary to take his other writings into account. In the “Theory of Moral Sentiments” (1759), he dealt with social philosophy ad general conduct. In the work upon which he was engaged when he died, the treated law and politics. The three together demonstrated from various aspects his belief in the “invisible hand” which controlled man’s actions in this world. But his successors severed the practical conclusions from the broader and deeper context, and converted the new philosophy into a doctrine of material individualism. ….

… Nevertheless his work marks the beginning of a new period in the economic thought. Some of the abuses that were committed in the name of the new freedom of action (such as the refusal at first to introduce factory legislation, the repression of labour organisations. Etc.) were due, apart from private motives, to the interpretation that innumerable followers put upon his writings rather than the views of Adam Smith himself (326-27)
.

Comment

We may deduce three things from Silverman’s paragraphs in the Appendix:

First, he held to a theological interpretation of the “Invisible hand” (not uncommon at the time – see also Alexander Gray, History of Economic Doctrine, 1931).

Second, Silverman was aware, and probably read, the 1896 volume edited by Edwin Cannan of the student notes of Adam Smith’s Lectures on Jurisprudence (known as ‘LJ(B)’ in the Glasgow Edition, 1978), which Cannan was offered, fortuitously via an Oxford solicitor. Another version was uncovered in Aberdeen in 1958 (now known as LJ(A)).

Thirdly, Silverman was aware of the differences between Adam Smith’s moral philosophy and his political economy, and the interpretations placed on them by the 19th century epigones (‘laissez-faire’, night-watchman state, and such like), a slant that would appeal to his constituency of working men and women.

In the 16th edition of Silverman’s text (1964), there has been much new writing, as well as various excisions. The reference to the invisible hand is still present (p 199) but the reference to the 19th-century misinterpretation of Smith by economists is absent. By then Silverman would have been 68.

This is only the fourth reference I have found to the Invisible Hand from the 1920s and 30s, which underlines its relative scarcity prior to the 1950s (unless Lost Legacy readers know better…).

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Tuesday, June 01, 2010

On the Genesis of the Myth of the Invisible Hand Metaphor, no 9

Alec Cairncross, 1944. An Introduction to Economics, London: Butterworth & Co.

There was no need to shackle the natural cupidity of businessman – indeed it was almost impious; for the “invisible hand” of market forces would transform cupidity into an unintentional benevolence. It was not the charity of bakers which assured us of our daily bread, but a more calculable and powerful motive – their self-interest. It was this motive which made the world go round without the meddlesome intervention of governments. Self-interest, spurned by the moralists as a vice, was exalted by economists as the driving force behind material progress and an adequate substitute for government regulation’ (p 400-1)

Comment
I am digging back into textbooks from my own collection in France and finding some references to the invisible hand of earlier vintage than I have expected.

This one from Alec Cairncross (later Sir Alec) was written before he became a member of the wartime civil service at the Ministry of Aircraft Production (1941) and published (1944) when he was a Lecturer In Political Economy at the University of Glasgow (where Adam Smith studied (1737-40) and eventually was a Professor of Moral Philosophy (1751-64). As Cairncross studied for his PhD at Cambridge, it is not clear where he picked up the above ideas. But his inclusion of the reference suggests there was a quite separate oral tradition in the UK from that at work at Chicago in the 1930s.

I shall write to his daughter, also a distinguished economist, at Essex College in the University Of Oxford (where Smith studied from 1740-44) and ask if she could throw some light on the question.

Professor Cairncross, latterly as Professor of Applied Economics at the University of Glasgow, when the third edition of his text was published in 1960, expanded the 1st (1944) and 2nd editions (1955), and with some obvious additions and excisions, kept his reference to the invisible hand almost word perfect (pp 601-2). It subsequent history is that it was in paperback edition in 1973 and a 6th edition is claimed for it in 1980.

All Lost Legacy’s reservations about the use of the invisible-hand metaphor in previous posts on the this series apply to this book too.