Thursday, May 12, 2011

Adam Smith's Much Wider Role for Exchange

[Apologies to readers who tried to visit Lost Legacy on Friday for the apparent break in service. This was due to Blogger Admin who stood down the Blogger system for several hours while they 'fixed' something technical.]

Dani Rodrik is quoted by Mark Thoma on the admirable Economist’s View Blog HERE:

'Success Requires More Than Individual Initiative'

Economists and Democracy, by Dani Rodrik, Project Syndicate’

Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action. Adam Smith may have been right that “the propensity to truck, barter, and exchange” is innate to humans, but a panoply of non-market institutions is needed to realize this propensity.

I see the importance of ‘a panoply of non-market institutions’, but cannot without comment let Dani Rodrik re-write a most important aspect of Adam Smith’s observation of “the propensity to truck, barter, and exchange” (WN I.ii.2: 25). First he did not say it was ‘innate’:

(‘whether this propensity be one of those original principles in human nature, of which no further account can be given’)

he went on to say: 'or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire’.

There are good reasons to show that Smith believed the propensity to exchange’ was from the latter, not the former.

His observations of the origins of language show how he thought language evolved – by early humans struggling to find and agree on matching sounds for common objects in nature and to agree on the rules for their derivation, first in simple names and then in their grammatical relations - see his Lectures on Rhetoric and Belles Letters ([1761] 1980. ‘Considerations Concerning the First Formation of Languages &&&’ in LRBL, 203-26).

Smith places the evolution of language from humans struggling to agree settled ideas about language early on in societies of speaking humans, and significantly, why numerous languages were present in different areas of the earth. Exchange, unlike sight, say, was not ‘innate’ – it was the outcome of ‘reason and speech’ driving social interactions that developed exchange propensities over time to meet the multifarious needs for co-ordination in all aspects of living in developing societies - where to hunt, where to sleep - and long, long - and even longer - before commercial trade was ever a notion in human minds.

And that is why the point I am making in respect of Rodrik (and Polanyi before him – with many others) is to highlight how he (and they) manage to elide Smith’s concept of exchange (riddled as it is throughout Moral Sentiments) into a mere synonym of commercial ‘trade’ when in fact Smith saw the 'exchange propensity' as the foundation of human social life. If Smith had meant ‘exchange’ only to apply to commercial trade he would have written it as the ‘propensity to trade’, but he did not write that nor did he restrict it in such a narrow manner (as some scholars are apt to do).

Smith had the propensity to exchange as a common theme running throughout all of his works and he reported instances of the exchange theme in his History of Astronomy – the exchange of explanations for the irregular phenomena of nature among primitive ‘savages’, terrified by what they experienced and inventing and sharing their pusillanimous religious superstitions; in Moral Sentiments in the role of conversation among people as they work through their behaviours and experiences of each other – each becoming like a ‘merchant’ (a simile), and, through the impartial spectator mechanism, moderate their expressions and their behaviours in consequence; in Lectures on Jurisprudence – the exchange of obligations in respect of the recognition of their natural liberties, the establishment of property, and the evolution of laws and justice; and in Wealth Of Nations - in exchanging one thing for another in trade from the division of labour (see his definition of the ‘bargain, WN I.ii: 26).

James Otteson traced the commonality of the exchange propensity in his ’Adam Smith’s market place of life’. 2003. Cambridge University Press – in my view a surprisingly under-mentioned work amongst historians of economic thought.

Smith then, did not ignore the ‘panoply of non-market institutions [that] is needed to realize this propensity’.

Those institutions were occasioned precisely by the same propensity to exchange that dominates most relations between humans. This was Smith’s main point in all of that which he wrote. Smith never had a crude neoclassical view of exchange, confined as it is, to the relationship between two or more mathematical variables open to determinate solutions, widely divorced from real humans in societies. Rodrik assaults an imaginary ‘homo economicus’ bereft of even the substance of its straw relatives.

Institutions are formed by people, not equations, and people have a ‘propensity for exchange’ that shapes the institutions they form. Less than perfect economies, with people in less than perfect liberty have formed working societies well short of perfection. Neither perfect competition nor perfect natural liberty (and we can add not even perfect institutions) are necessary or sufficient for progress towards opulence (Smith rebuked Dr Quesnay on this very issue: WN IV.ix.28.674).

Rodrik should direct his remarks about narrow vision to those modern scholars who have a limited knowledge of what Adam Smith actually said, and either they make it up from insufficient grasp of Smith’s ‘market place of life’, or they repeat the insufficient grasp of others.


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