Monday, January 17, 2011

Further Comments on Jeff Weintraub and Adam Smith's Explanations of Rising Real Wages

Dear Jeff Weintraub

Thank you for your interesting response to my comments on your debate with your students (incidentally, I admire your excellent scholarly dialogic debating style, intended to help your students think for themselves rather than just thoughtlessly accept what they are taught).

Incidentally, I was unable to send my comments direct to you because I could find no contact email address on your site (mine is: gavink9ATgmailDOTcom).

I accept that among the requirements of teaching about the classical economists it must include covering Ricardo et al, and it is clearly necessary to be comprehensive. However, I find the inclusion of Ricardo in discussions of Adam Smith’s meanings is often, at least for me, exasperating, as Ricardo’s theoretical ‘improvements’ showed he had a quite different understanding of what Smith’s political economy was about. Ricardo is popular as a ‘theorist’, with several modern economists, with whom I maintain friendly relations (e.g., Terry Peach of Manchester), but I find the gap between Ricardo on Smith’s historical approach is near impossible to bridge (though, of course, that is no reason ever to fall out over it).

I am sure that we would agree on quite a lot about Smith if we were in the same room. If it comes down to explaining “whether Smith has a satisfactory theoretical explanation for how and why …. in a market economy… [it produced] … a broad-based improvement in most people's standard of living”, I would start with what Smith was saying and never, from bitter experience, with what modern economists, including Ricardo, say he said or meant.

I must defer to you in agreeing that he did not state his ideas or method explicitly in a manner acceptable to modern theorists. There are explanations in WN, but it is wrapped-up in non-formal language, and we have to dig it out, so to speak. It is worth the trouble of doing so. Better that way in my view than adopting ‘theoretical reasoning’ that turns out to be wrong (biological subsistence only) and ‘clarifiers’ used to predict immiseration.

The view outside Ricardo’s windows (and from Marx and Engels’s even loftier perches) was quite depressing and misleading. The new urban, not to say wretched, poor were growing faster numerically from immigration (Ireland) and the ‘attraction’ of the cities from the land (then no rural paradise, to put it mildly) than the capacity of new forms of manufacturing and trade activities to provide employment, from which real incomes could rise (6p a day for six year-olds beat nothing a day). Though evidence of rising real incomes from 1760-1860s onwards conforms to the historical trends identified by Smith. This often, but not always, miserable introduction to the commercial economy is an experience all too familiar in parts of the world today, which many ‘westerners’ do not appreciate – our ancestors paid their heavy ‘admission’ price to the Age of Commerce, not us.

Output was sold to the population in ever-greater amounts with slowly rising quality (differentiated, of course, across the income classes). Take a simple indicator: the growth in the manufacture of ‘conveniences and amusements’ in the form of children’s toys from the 1750s onwards. What somebody earned as wages from making, they spent to purchase other ‘necessaries and conveniences’, and, on occasion, second- or third-hand ‘amusements’ of life. [Smith in WN reports that King James VI and 1st’s former wedding-bed was an ‘ornament’ at an alehouse in Scotland (WN II.iii.39: 347).]

All this, and much else, was over-shadowed by all the very real oppressive social interventions, despite which, market relationships had produced and continued to produce broad-based, if initially minute, improvements in growing numbers of people's standards of living over several decades and centuries. The Malthusian trap was foiled for the first time in millennia. There were, however, many laws and political barriers left to reform – most waited until the 20th century, but much are still with us, plus plenty of new ones.

There was also ‘middle-ranking’ (‘wives of Aldermen’, TMS I.iii.2.6.8: 57) rank, place and prejudices operating against common folk getting ‘above themselves’ and imitating the dress sense and habits of their ‘betters’ (mocked by US folk lore in ‘Yankee Doodle’ and his feathered hat, which he called ‘Macaroni’; unhappily, a most unlikely scene in 18th-century Scotland).

As small manufacturing gave way to workshops, and the numbers of skilled labourers increased, plus new trades (mechanization) and new supervisory posts proliferated, real incomes increased for new occupations. The Mechanics Institutes movement (teaching young artisans to work with new skills in chemistry, physics, maths, and designs in the new industries) began to appear in the 1800s (among them the predecessor of Heriot-Watt University in 1821).

The ‘pinhead’ example should be placed in context. New working methods required new mechanical apparatus (beautifully illustrated and detailed in Diderot’s Encyclopedia, 1751-77), which required new manufacturing capacity, and was a process that grew and accelerated in new industries from then on. These cost more – much more after steam power was harnessed – with higher demand for the necessary skills and education to design and make them. These also raised the real wages of new grades of labour and undermined the survival-only subsistence pessimism of Ricardo (and Malthus). Increasing, not decreasing, returns to scale became a feature of the non-agricultural economy, not really challenged until the 1920s, nor really integrated into growth theory until Romer in the 1980s – so much for ‘theorists’ not catching up with the real world.

The absence in Smith of a ‘theoretical explanations’ for all these events in the real world is worth setting good students the task of thinking about (it should make them even better students). But I am wary of changing from ‘what works in practice, but may not work in theory’ (Adam Smith’s political economy) into an exercise of adopting something that ‘works in theory, but definitely does not work in practice’ (including the dead-end of diminishing returns). However, I accept your challenge and will return to the subject in due course.

I am glad that I spotted your article and was able to join a debate if only from the sidelines. Good students deserve good teachers, and on this evidence, fortunately, Daniel Albornoz and David Kanter, have found one.

Gavin Kennedy
Professor Emeritus, Heriot-Watt University

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