On Learning the Real Lessons of the 1930s Depression

Tom Clougherty (29 July) writes on the Adam Smith Institute Blog (HERE): a revealing and excellent account of the mythical explanations of what prolonged the Great Depression in the 1930s and what actually was its likely cause, contrary to Maynard Keynes’ widely accepted narrative in his 1936, General Theory, and in the post-war teachings of modern universities, up to the 1980s (which I, and members of the post-war university generation of economists took as gospel).

Follow the link and read Tom’s account. I have selected one paragraph from it for comment on the largely ignored side effect of the debate on Keynes’ narrative.

“Debunking the Great Depression Myth”

‘Indeed, Roosevelt was heavily influenced by his 'brains trust', which in turn was influenced by a variety of collectivist ideologies – progressivism, corporatism (of the European fascist variety), and socialism. The common theme was 'scientific' economic management by enlightened central planners, and a rejection of the free market. And, OK, perhaps that went beyond what Keynes himself would probably have advocated.”

Features of this debate are long forgotten but at the time it had some interesting side effects. People debating competing practical policies also rely on (and imply) competing theories. In the 1930s, the presence of Soviet Communism with the first of its 5-year plans’ counter-poised to capitalism, with its supposed ‘laissez-faire’ theories (though not so evident practices – tariffs, etc.,). This was the main political challenge in Europe (from the growth of communist and socialist labour parties) and in the USA (leftish Democrats v rightist Republicans), to which were added rapid military expansion into Western Europe by the Soviet Army and, in China, the seizure of power by Mao's Red Army.

Economists responded to the alleged virtues of state planning with claims for the benefits of markets and this was, perhaps, sourced from the distorting oral traditions in Cambridge, England, and Chicago, of claims for market-superiority based partly on (invented) attributions about Adam Smith’s supposed ‘invisible hand’. Oscar Lange, a Marxist economist (On the Economic Theory of Socialism, 1936 & 1938), asserted that socialist state-planning was a substitute for the market's invisible hand and claimed that socialism would do much better in directing the economy to its most productive uses than the unreliable and uncertain invisible hand:

“The market has, therefore, been compared to that of an invisible hand which produces co-ordination out of the autonomous decisions of many separate units. Not all markets, however, are able to produce such coordination, nor is the coordination obtained always consistent with accepted social objectives. In such cases, planning is used to either reach the co-ordination, otherwise unobtainable or to correct the co-ordination produced by the invisible hand of the market” (Lange 1945, 26).

Paul Samuelson, while an undergraduate at Chicago, was taught that the invented ‘invisible hand’ theory belonged to Adam Smith, and in his famous and popular textbook (Economics: an introductory analysis, 1948, p 36) responded implicitly to the challenge of socialist planning by placing Smith’s alleged theory of the invisible hand as relevant only to a purely laissez-faire economy but not to a post-war mixed capitalist economy. This perpetuated a myth about Adam Smith (he never saw the metaphor of an invisible hand as connected to markets), but the belief that he did, became (and still is) ubiquitous.

It helped cement Keynes’ narrative of the Great `Depression’ – he referred to the alternatives of democratic governments’ demand management as an alternative to laissez-faire, classical 'do nothing' policies that allegedly were believed and advocated by ‘classical’ economics as best way to respond to crises. Keynes created a narrative of the causes of the 1930s depression that is now widely accepted along with its (not Smith’s) failures of ‘an invisible hand’, which is heard often in today’s debates on the current recession. Some politicians that it was the alleged absence of 'regulation' and state intervention –and a belief in 'laissez-faire' - that led to these crises in the first place and they advocate, instead, more regulations and more state stimulation by ‘quantative easing’, ‘subsidies’ and even ‘more borrowing’ (after the state’s credit cards are already ‘maxed out’!).

As the real lessons of the 1930s depression have not featured much in today's debate (and Tom Cougherty post is an excellent place to start) it might help clarify what is needed by paying close attention to it.

[Disclosure: I am a Fellow of the Adam Smith Institute.]

"Moral Magnanimity and Moral Markets": a naive dilemma?

Dwight R. Lee, is professor of economics at Southern Methodist University, has posted (19 July) in the Moral Liberal (HERE):

“The Economics of Caring and Sharing
Free Enterprise Zone” (from The Freeman)

“Market morality can be achieved, according to Adam Smith in The Theory of Moral Sentiments, “by sitting still and doing nothing.” And while markets reward kindness and caring for those with whom we have personal exchanges, the vast majority of the exchanges we benefit from are impersonal; we neither know nor meaningfully care for those on the other side of the exchange.

Comment

Actually, Smith applied this statement about “by sitting still and doing nothing.” to meeting the virtue of Justice.
Similarly, relations within our immediate circle of family and close friends tend to be most personal and close, and then successively diminishing as the people we transact with are further from our immediate circle.
Finally, we most certainly have to be concerned with those we transact with in market exchanges – see WN: I.ii.2: p27: ‘we address ourselves, not to their humanity. But to their self-love ,and never talk to them of our necessities but of their advantages’.

Disregarding (i.e., not caring) about those we directly transact with leads to poorer or no bargains. The anonymity begins beyond the immediate partner transactions – we care less about them because we do not know, nor need to know, of them – and so on along supply and demand chains beyond those with whom we directly transact, which is a creditable, as well as necessary condition, for complex transactions amidst modern opulence (and was true in Smith’s day too).

Dwight R. Lee:
Since these impersonal exchanges create enormous benefits from outcomes that emerge without conscious direction, people seldom give much thought to those benefits or the market morality on which they depend. Of course people do think about markets occasionally, but when they do it is seldom with appreciation for the benefits they are receiving. More often than not people think about markets when they are being inconvenienced by the market discipline—the requirements “imposed” on us, for example, in return for income—that makes their benefits possible. Few of us connect such discipline to the far greater benefits we receive as a consequence, particularly when we see others who appear to be reaping great rewards from the very discipline that is apparently making us so much worse off. Under these circumstances it is easy to conclude that we are imposed on unnecessarily by the greed of others. How easy it is to also believe there is something immoral with an economic system that not only tolerates greed but also rewards it.

Comment
It is forgetful of the history of what “worse off‘ meant compared to the societies our predecessors lived in for many millennia before the ‘Age of Commerce’ that Smith analysed that makes it too easy to write about today’s economic system “that is apparently making us so much worse off.’ Compared to what – Somalia, rural China, India, Brazil, North Korea?
Moreover, since when was “an economic system that not only tolerates greed but also rewards it” something new and unprecedented in the history of the human societies, right up to now? The vast majority of the history has often had no choice but to ‘tolerate’ the vile rulers of mankind since long before ‘market morality’ was introduced.

Dwight R. Lee:
“When economists make the case for what they see as the most impressive feature of markets, they typically do so with the aid of Adam Smith in a way that reinforces the view that markets at best lack morality. Smith understood and appreciated magnanimous morality, as any reader of The Theory of Moral Sentiments, his first book, knows. But this would not be known to someone who knew only Smith’s “invisible hand” argument for markets in The Wealth of Nations'.

Comment
Given that “someone who knew only Smith’s “invisible hand” argument for markets in The Wealth of Nations” is living under an illusion, cruelly spread by modern economists, who saw this myth as the ‘advantage’ of capitalism over socialism during the Cold War decades (Samuelson, 1948, et al) and, ironically, by Marxists (Oscar Lange, 1946) as a convenient though false criticism of markets. The myths of the ‘invisible hand of the market”, which Adam Smith never articulated in Wealth Of Nations, nor in Moral Sentiments”, because, as we show endlessly on Lost Legacy, Smith had no such “argument”. It was “invented’ and popularized from-mid 20th century, but not in 1759, nor in 1776.

Dwight R. Lee:
“The advantage of markets, according to Smith, is that by pursuing their own interests in the marketplace, people unintentionally do more to promote the public interest (the interest of no one in particular) than if it had been their intention to do so. [GK: Agreed] This argument ignores every requirement for magnanimous morality, and the way economists phrase the argument makes it easy for people to conclude erroneously that the argument for the market rules out the more personal caring and sharing in which our personal relationships are rooted.”

Comment
Only if Adam Smith’s notion of “self-interest” elides into “selfishness”, which he consistently condemned as “licentious” and “wholly pernicious” referring to Bernard Mandeville, 1724i, n Moral Sentiments (TMS IV.ii.4.6: 308, etc.,) and popularized by Geko’s script writer in “Wall Street” and numerous modern economists and media people almost everyday.

Dwight R. Lee:
“Calls for a more moral marketplace — sometimes referred to as capitalism with a human face—are invariably motivated by the hope of substituting the instinctive morality of the small group for the morality of impersonal markets. …

… The primary advantage of markets is that they provide each of us with the information and motivation to share with literally millions of people, without caring for them.

Comment
Apart from the naïve reliance on “small group morality” of early hunter-gather societies as a model for the future, Professor Lee should add to the moral balance sheet the anthropological data of the death rates inside those small groups and with their neighbours was higher by far than that of what we regard as the very violent wars and urban murder rates experienced in the 20th century among males, not to mention the incidence rape and forced cohabitation among captured women in the very violent ‘wars’ of “small groups. There is no reason to believe that the 21st century (so far) has managed to approach the comparison death rates of the ‘small group’ societies of all previous millennia before capitalism.

Incidentally, these early societies were truly anonymous in every sense in their lack of knowledge or acquaintance of distant neighbouring other ‘small – even large – groups’, living hundreds of miles away across a continent, and were completely ignorant of other “anonymous” groups in distant continents. For example, when those small tribes left Africa and some walked over the generations to what we call Australia, they became ‘unknown’ and truly ‘anonymous’ years until Dutch and Chinese explorers found them for over 60,000 years later.

Today, their descendant children can see on television all the affairs of the otherwise “anonymous” children of those their ancestors left behind.

Adam Smith On Bargaining (Again)

Philip Pilkington writes on Naked Capitalism (HERE):

In a part of his piece, Philip Pilkington, a journalist living in Dublin, makes a strong case that is worth reading in its own rights (follow the above link) against neoclassical economics, especially in the form of rational expectations theory, but he also links neoclassical theories, originating in the 1870s and in ‘marginalism’, to Adam Smith’s (died 1790) alleged complicity in neoclassical doctrine, largely based on its applying elementary calculus from imagined (heroic) assumptions about individual maximising behaviours under the guidance of a so-called ‘invisible hand’, and at once buys into modern, deeply flawed and utterly false assertions about the IH metaphor in Adam Smith’s thinking. This is a sample:

“Philip Pilkington: Neoclassical Dogma: How Economists Rationalise Their Hatred of Free Choice”

“Rational expectations theory expects people to act, well, rationally. More specifically it assumes that people always act in order to ‘maximise their utility’ and that such actions result in optimal behaviours that ensure that prices are always perfectly in keeping with what they ‘should be’ – that is, an equilibrium price that perfectly balances supply and demand.”

Comment
Whatever relevance this paragraph has for rational expectations theory it has absolutely no relevance for Adam Smith’s theory of ‘market’ and ‘natural’ prices (WN Books I and II). Smith did not have an equilibrium theory of prices – quite the opposite! Disequilibrium was a more noted feature of markets, within which its powerful affects work through. Not only did Smith's explanation of ‘natural’ and ‘market’ prices 'gravitate' towards each other, but they do not necessarily (if ever) meet in a durable equilibrium. I refer to his explanation claim that his description of the real word, though it does express an important feature of it in the minds of buyer's and sellers, which is buried within it and mostly overlooked in price theory.

By ‘natural price’, Smith meant a price that covered a product’s costs plus a profit. The price that covered its costs often varied from one ‘neighbourhood’ to another. In the real world described by Smith a single stable market price did not exist. By ‘market price, Smith meant the ‘actual price’ at which a commodity was sold, which may be above, the same as, or below its ‘natural' price. Sellers do not always get the price that they want because they are not in unilateral control of exchange prices when they negotiate prices with buyers.

When economists dropped Smith's distinction between ‘natural’ and ‘market’ prices we may have gained in succinctness but we lost an important distinction that lies at the root of the frustration of planned outcomes, particularly the outcomes of bargaining in real markets between real buyers and real sellers, who are not present in the mathematics of price among sellers and buyers. Buyers are uninterested in a seller’s costs but sellers are constrained in their bargains by their costs which they hope (intend) to recover, which they have already expended, and by the profit that sellers hope (expect) to gain. Buyers hope to achieve lower prices than sellers hope to achieve.

Smith summed the offered bargain: ‘Give me that which I want and you shall this which you want’. The bargaining problem is that both the buyer and the seller can (and do) seek exactly the same form of the bargain yet each side’s idea of the content of the bargaining offer the hope to achieve can (and usually is) quite different from when the offer with which they open the negotiation. That difference is the agenda for their ‘higgling and haggling’, which is a process considered (rightly) to be widespread both in bargaining (WN) and in general persuasion (TMS).

Smith advised each bargainer to each ‘address’ the other’s ‘self love’ (not their own!) and ‘never to talk to them’ of their own ‘necessities ‘ but of the ‘advantages to the other of concluding a bargain (WN I.ii.2: 26-27). Sellers receive considerable, regular, and mainly expensive, training in the appropriate language, deportment, and manners of the selling process. Major buyers also receive training, though in my experience this less intense and less expensive than accorded to sellers.

Just why the outcome of all the myriad bargains occurring each day (hour!) should provide a single and distinct ‘equilibrium’ price all along all of the supply chains is not evident, except by heroic assumptions. Truly a triumph of credulity over observed experience, observed in a classroom, but not in the real world among business negotiators. Anybody believing that there is an equilibrium price for something does not undertake much bargaining.

Adam Smith's brief treatment of the bargaining process was succinct and closer to events in the real world than much of the mathematical attempts of neoclassical economists, including the efforts of Edgeworth's box diagrams and the coercive sanctions and convergence focus of theorists from Zuethen and Hicks in 1931, and Nash, Pen, Shackle, Harsanyi, Cross, Coddington, plus many others from the 1950s onwards.

Metaphors Are Not Real

Jeff Carter writes for Business Insider (HERE):

"Behaviorial Economics Isn't Rational"

“True free market economics in the Adam Smith vein has a lot of warts. It’s messy. People make mistakes. Sometimes it takes a bit longer for a market to clear. There are winners and losers. Many will point to things as being unfair. But, it’s the most efficient way to allocate capital and to raise the standard of living for all society. There is no getting around it, people intrinsically weigh opportunity costs/benefits and make utility maximizing decisions for themselves. That’s what makes the world go round. Some people are able to process information quicker than others, are smarter than others, and have more material advantages than others-but that playing field has been with us since the dawn of mankind. There is no way to even it.

The internet has made it possible to have true worldwide markets. It's possible to quickly exchange information and act on it across borders and time. Simply look at the speed at which news travels today versus even ten years ago. It's much faster and more efficient. You don't even need to watch television news anymore, just follow the right people on Twitter. 

Demand curves always slope down. The study concludes, “Adam Smith’s invisible hand may be more powerful than originally thought….it may generate aggregate rationality not only from individual rationality but also from individual irrationality."

Comment
There is one big flaw in Jeff Carter's self-satisfied argument: there is no such thing as a general ‘invisible hand’. It’s a metaphor: it has an object, different from itself. The metaphor is only as “powerful” as the “object” it “describes” in “a striking and interesting manner” (Adam Smith: Lectures on Rhetoric and Belles Letters”, [17563] 1983, p 29).

When Adam Smith used the IH metaphor, only twice in his published writings, he was not referring to “demand curves”, market demand, or the price system (see Theory of Moral Sentiments, Part IV 1.10: 184) and Wealth Of Nations Book IV. II. 9: 456). In fact, he never used the IH in relation to markets or competition.

In TMS he referred to “unfeeling” landlords having to feed their servants, retainers, field slaves/ serfs/ tenants from the inevitable necessity of doing so – no food no labour; no labour no food. In WN he referred to some, but clearly not all merchants – Britain’s foreign trade made it a major exporter and importer in the 18th century - whose “insecurity” led them to invest in “domestick industry”, which in consequence, and without their intention, quantitatively increased domestick annual output of the “necessaries, conveniences, and amusements of life” (WN Introduction, p 10), and he considered this outcome contributed to the public good. (It follows, thereby, on this argument that those merchants who engaged in the “foreign trade of consumption” initially, at least, lowered investment in “domestick industry”).

For both of these examples Smith used the metaphor of “an invisible hand” leading them to act in certain ways – in TMS, from the landlord’s following the dictates of their self “deception” and absolute necessity, and in WN, from some merchants reacting to their feelings of “insecurity” to avoid foreign trade. The IH metaphor was not real in itself; the invisible workings of the brains of those landlords and those merchants “led” them to behave as they did. No actual "hands" led them to do anything - metaphors do nothing themselves they are literary imaginations for the real world.

The metaphor expressed these actions “in a more striking and interesting manner”. In Smith’s use it had nothing to do with markets and the price system, etc. The popular notion that it did have such a connection was an invention in modern economics from the 1940s (Paul Samuelson and others).

Whether behavioural economics is “rational” or “irrational” is not addressed by the IH metaphor.

Careless Referees?

Rafael Garcia-Mata, Etienne Boulter & Keith Burridge write (HERE):

The 'invisible hand': regulation of RHO GTPases by RHOGDIs

“Abstract”

“The 'invisible hand' is a term originally coined by Adam Smith in The Theory of Moral Sentiments to describe the forces of self-interest, competition and supply and demand that regulate the resources in society. This metaphor continues to be used by economists to describe the self-regulating nature of a market economy. The same metaphor can be used to describe the RHO-specific guanine nucleotide dissociation inhibitor (RHOGDI) family, which operates in the background, as an invisible hand, using similar forces to regulate the RHO GTPase cycle.”

Comment
Presumably a scientific, refereed journal, from a discipline outside economics. Nevertheless, it is wholly inaccurate to make such claims for Adam Smith’s use of the IH metaphor.

In TMS, Smith did not use the IH metaphor to “describe the forces of self-interest, competition and supply and demand that regulate the resources in society”.

If any of the three authors read TMS (Book IV) they will not find any mention of “competition and supply and demand that regulate the resources in society”, nor will they find it in Wealth Of Nations.

I cannot comment on the “regulation of RHO GTPases by RHOGDIs”, but whatever that means it is not better understood by reference to Adam Smith and the IH metaphor.

Referees should know that to check references to books in other disciplines.

History of the Myth of the Invisible Hand

Over lunch at the Bank of England [in April, 1946, just days before Maynard died], Keynes is claimed to have told Henry Clay (a professor of Social Economics and Advisor to the Bank of England) of his hopes that Adams Smith's "invisible hand" can help Britain out of the economic hole it was in after the Second World War with a near-exhausted British economy, deeply in debt to the USA:

"I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

Comment
This one of those unverifiable statements attributed to Keynes, interesting in itself, and also for what it leaves unsaid about the history of this modern myth of 'an invisible hand'.

But of more interest historically, it is some confirmation of the existence of an oral tradition at Cambridge University that articulated ideas about the meaning Smith was supposed to have attributed to his use of the ‘invisible hand’ metaphor. Sometime, since Alfred Marshall dominated economic teaching in British universities and A.C. Pigou, his immediate heir, had carried on in his teachings, and, in his case, had published the same ideas from the oral tradition in his early editions of Welfare Economics – largely to undermine the ‘invisible hand’ of the economy with his academic case for the government using intervention by taxation to achieve welfare objectives that were allegedly immune to the beneficial activities of ‘an invisible hand’.

The oral tradition was necessarily an heavily massaged version of Adam Smith’s limited usage of the metaphor (only twice in all his published writings) and in no way did Smith use it in reference to the workings of markets. The assertions of Henry Clay in 1946 mark the mid 1920s as when Keynes said he had "tried had to eject [the IH metaphor] from economic”.

This is in line with Paul Samuelson’s claim that he had heard the oral case linked to Adam Smith, at Chicago when he was an undergraduate there in the early 1930s, which fits the similar use of the ‘invisible hand’ by Oscar Lange (a Marxist) as a feature of capitalist economies (in his The Economic Theory of Socialism 1936 and 1938). In these publications, Lange saw the community state substituting planning for the so-called "invisible hand'.

To Paul Samuelson goes the dubious honour of popularising these myths of “Adam Smith’s invisible hand” across US academe through the 20 editions of his successful textbook, Economics: an introductory analysis (McGraw-Hill) 1948 (2010).

It is in the nature of oral traditions to leave no traces of them and they die out with the passing of the perpetrators – and it is only when oral assertions and pass into print (or, today, online) that we pick up hard evidence.

It is remarkable that only a few economists either drew attention to the oral tradition of the (mis)use of the IH metaphor or integrated the myths into their own works until the explosion of mentions of the myth began to appear in the decades following Samuelson’s references to it. Now it is ubiquitous, and in too many case also plain silly ('the invisible hand kicking people in the behind', etc.,).

Certainly, few, if any (I would say ‘none’ did, but you never know if something may turn up – and Lost Legacy readers are always a useful source of snippets that I will follow if any emerge), of Smith’s contemporaries considered the IH metaphor of any importance or relevant to Smith’s works, and precious few – a handful, not all of them economists – ever mentioned Adam Smith and the metaphor until the late 19th century and the beginning of the 20th century.

My searc continues.

REPAIR AND RENOVATION OF ADAM SMITH’S PANMURE HOUSE APPROVED! (at last)

It has just been announced (11.30 am this morning!) that the Scottish Government has approved the proposals from Edinburgh Business School (Heriot-Watt University) for the sympathetic renovation of ‘Panmure House’, just off old Edinburgh’s historic Royal Mile, where Adam Smith lived from 1778 up to his death in 1790.

The planning authorities have at last given the go ahead, despite objections from ‘Historic Scotland’, a statutory publicly-funded body (forcing a public inquiry), into the important features necessary in EBS plans both to comply with current legal requirements for public access (wheel-chair access, fire exits, and public toilets) and to allow the old building (1697) to be suitable for its educational and research purposes, and to preserve it historic character as Adam Smith's house.

This is an example of public legal regulations having expensive and frustrating consequences for a market-funded Business School's attempt to meet them in the most sympathetic way, being disputed by another publicly-funded body, forcing long delays until the Scottish Government made its final decision, all of which objection and inquiry work was funded by the taxpayer (excepting the work and cost of the delay and inquiry to the non-state financed Edinburgh Business School) .

EBS proposed to construct an imaginative glass atrium to the original rear of Panmure House, to allow compliance with the standard regulations requiring the provision for access for wheel-chairs, fire regulations, and to modernise the toilet provision inside the building. The problem was that providing for these desirable (and legal) facilities within the confined space of a 16th-century building, as insisted by Historic Scotland, was not possible without enabling safe access to the upper floor for people from outside the building. This was why EBS proposed a solution involving an attractive glass atrium to provide both for safe access and exit by all visitors, including a lift for those in wheel chairs, while leaving the original stone walls completely visible without damage to the original fabric, to leave adequate useable space inside Panmure House. Historic Scotland disagreed and forced a pubic inquiry.

With today's planning approvals, EBS can now commence to put its ambitious plans into action. The architects can detail their drawings, the funds can now be mobilised from generous donors around the world, and everything prepared for Panmure House to become, not just a (welcome) magnet for visitors to Edinburgh, but also for its serious academic and educational work to commence (at no cost to the public purse).

Gavin Kennedy (Emeritus Professor, Heriot-Watt University, Edinburgh)

Thought For The Day II

Recent exchanges on the meaning Adam Smith attributed to the invisible hand have prompted me to thoughts about how markets work and how they evolve unintentionally over time. To this end, I have been looking at certain texts by Adam Smith.

“They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. 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: 186-7).

This passage is more literary than historical. By referring to ‘Providence’ in this manner, Smith executed a nice evasion and did not have to explain the means by which this operation was carried out, and most readers, familiar if only vaguely with language that resorted to providential interventions, would accept Smith’s alusion without questioning it.

In his Lectures On Jurisprudence (6 January, 1762), Smith gives an altogether less Providential gloss to the passivity by which property-less peasants accepted the dictates of a benign Providence:

“The tyranny of the feudal government and the inclination men have to extort all they can from their inferiours, has brought property in some measure into these subjects. By the civil law and the constitutions of most countries in ancient times, game was considered as being free to every one. And this certainly is what is most agreable to reason. For no one can have any power over an animall of this sort, nor can he claim the property of it, because it pastures on his ground just now, for perhaps the next
moment it may be on another mans ground. But when the feudal government was established, which was the foundation and still prevails in some measure in all the governments in Europe, the king and his nobles appropriated to themselves every
thing they could, without great hazard of giving umbrage to an enslaved people" LJ(A) i.55: 23).

War lords, following the Fall of Rome after the 5th century, seized ownership of the land in Western Europe and all that was on it, by violence and the threat of violence, “without great hazard of giving umbrage” from those in no position to resist. Earlier, Roman attempts to divide the land equally among its citizens also suffered from natural pressures of human societies over the ever-present tensions common between the generations, to which, incidentally, he exposed his Glasgow students in his Jurisprudence classes and his readers in Wealth Of Nations. His conclusions about legislating for “equality” are worthy of consideration by those peddling modern idealistic utopias:

“Rome, like most of the other ancient republicks, was originally founded upon an Agrarian law, which divided the publick territory in a certain proportion among the different citizens who composed the state. The course of human affairs, by marriage, by succession, and by alienation, necessarily deranged this original division, and frequently threw the lands, which had been allotted for the maintenance of many different families into the possession of a single person. To remedy this disorder, for such it was supposed to be, a law was made, restricting the quantity of land which any citizen could possess to five hundred jugera, about three hundred and fifty English acres. This law, however, though we read of its having been executed upon one or two occasions, was either neglected or evaded, and the inequality of fortunes went on continually increasing. The greater part of the citizens had no land, and without it the manners and customs of those times rendered it difficult for a freeman to maintain his independency” (WN VII.3: 556-7).

Smith was more candid about the literary niceties when he taught his Jurisprudence students in 1762 and when he published Wealth of Nations in 1776, than about the role of Providence that he expressed in Moral Sentiments (1759), when he taught his Jurisprudence students in 1762 and when he had published Wealth of Nations in 1776. In this approach he was closer to Richard Cantillon’s ([1735] 1755) assessments of the realities of the origins of feudal inequalities than appears from Moral Sentiments, where he was making a different point, namely that the illusion of great power of the feudal lord over his inferiors, nevertheless, meant that the ‘inferiors’ “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.”

Cantillon, more realistically noted that:

“...even if the Prince distribute the land equally among all inhabitants it will ultimately be divided among a small number. One man will have several Children and cannot leave to each of them a portion of Land equal to his own; another will die without Children, and will leave his portion to some one who one who has land already rather than to one who has none; a third will be lazy, prodigal, or sickly, and be obliged to sell his portion to another who is frugal and industrious, who will continually add to his Estate by new purchases and will employ upon the Labour of those who having no Land of their own are compelled to offer their labour in order to live” (Cantillon, [1735] Essai Sur La Nature Du Commerce en Generale, p5, ed. and trans. Henry Higgs, Augustus M. Kelly, New York, 1964).

As if to make the general comment on the true source of the Landlords’ status as owners of the land, Cantillon makes a more pointed remark that contrasts with to Smith’s, albeit later, non-historical story about ‘Providence’”

“It does not appear that Providence has given the Right of the Possession of Land to one Man preferably to another: the most ancient Titles are founded on violence and Conquest. … But howsoever people come into the property and possession of Land we have already observed that it always falls into the hands of a few in proportion to the total inhabitants.

“If the Proprietor of a great Estate keeps it in his own hands he will employ Slaves or free men to work upon it. If he have many Slaves he must have Overseers to keep them at work: he must likewise have Slave craftsmen to supply the needs and conveniences of life for himself and his workers, and must have trades taught to others in order to carry on the work.

In this economy he must allow his labouring Slaves their subsistence and the wherewithal to bring up their Children” (Cantillon, p 32-3).

I suggest these extracts from Smith’s Lectures On Jurisprudence and Wealth Of Nations, and the quotes from Cantillon (Smith quoted or was influenced closely from his Essai, WN I.viii.15: p 85, etc.,), demonstrate that the Providence allusion in Moral Sentiments was, well, just a literary allusion; Smith knew perfectly well, and taught, that the earth was divided by men (not 'Providence'), using violence.

Anyway you look at the historical reality, the so-called ‘equality’ they allegedly obtained in Moral Sentiments from 'Providence', was barely enough for biological subsistence, and not apparent at all in the ‘conveniences and the amusements’ of life. This shows that so-called Divine Providence had barely, if at all, moved common labourers and their families much further on than obtained when their ancestors ran in the forests. And War Lordism and Feudalism lasted for over a thousand years, finally being undermined and eradicated in Europe by the re-appearance of the Age of Commerce that led to capitalism.

The Inventor of ‘Capitalism’ is 200 years-old Today

William Makepeace Thackeray, (1811-1863), novelist, was born on 18 July 1811 at Calcutta, the only child of Richmond Thackeray (1781-1815), secretary to the board of revenue in the East India Company at Calcutta, and Anne Becher (1792-1864), second daughter of John Harman Becher, a writer for the East India Company, and his wife, Harriet.

For a full biography see his entry in the Oxford English Dictionary (HERE).

Thackeray wrote The Newcomes and published it in serial form from 1854. In it he ‘chronicles the affairs of a most respectable family' of merchants, bankers, and petty aristocrats. The respectability is primarily one of manners and appearances, and the novel reveals in great detail intense intra-family jealousies, rivalries, fights, and outward politeness’ (OED).

No summary of any of Thackeray’s novels, or the hundreds of his short essays and, usually mocking, vignettes, can capture his unique and insightful style.

As a student, I purchased a secondhand copy of Thackeray’s biting satire, The Book of Snobs, and treasured it for many years. Alas, I cannot find my copy today. In the first-year English class at University, we read Thackeray’s Vanity Fair (what a joy!).

Years later, I picked up another of my second-hand little volumes, The Newcomes, and enjoyed it thoroughly. Coincidentally, I examined the origins of the word ‘capitalism’ in the great, Oxford English Dictionary and found to my double delight, the first use of ‘capitalism’ in English was credited to Thackeray in his novel the Newcomes (1854), where he mentions ‘capitalism’ several times.

As they say the rest is history. ‘Capitalism’ as a word is now ubiquitous, praised by some condemned by others. In the popular press, and sometimes in more serious publications, ‘capitalism’ is (falsely) credited to Adam Smith (who never heard, nor knew, of the word) and back-projected onto manifestations of early commercial societies in late medieval periods and right up to the tail-end of the so-called ‘industrial revolution. Erroneously, it is credited to Karl Marx.

No, it was a modest novelist, with a great sense of the humourous and pompous follies of the men and women in modern societies, who quietly used the word for the first time in English. Though born to East India Company English parents in India, he travelled and lived widely, spoke fluent French and German, visited the United States and had investments in its railroads and the early telegraph companies, knew a fair share of bankers and men of money, and also of a snobbish social slice of the English upper classes and their transatlantic cousins.

Thackeray saw all sides of the new capitalists – and their wives and extended families, and the mother-in-laws of all classes, of whom he had little that was kind to say about them. His stories would make great television and DVDs for a new generation of non-readers of books.

Follow the link and read his OED and DNB entries – perhaps also stretch your mind by reading his essays and novels. If they disappoint you,I am sure that Thackeray cast a character of like-minded preferences to your good self.

Modern Physiocrats, Witch-Doctors and Their Pretensions

From ‘Quotation of the Day’ (July 14) at DON BOUDREAUX’s invaluable Café Hayek Blog (‘where orders emerge’) HERE:

From Hayek’s 1974 Nobel Prize lecture, “The Pretense of Knowledge“:

“This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.

The correlation between aggregate demand and total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard there may thus well exist better “scientific” evidence for a false theory, which will be accepted because it is more “scientific”, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.”


Comment
This extract is well worth reading and considering, as we have come to expect from Don Boudreaux’s daily Blog (but I wish I could say the same about some of the comments he attracts from some of his readers) (follow the link to the Blog -but give the comments a miss).

Hayek puts his point so well and it is so relevant to the current cul de sac into which economic has driven itself under the influence of the ‘scientific’ mathematicians who drain it of much of its relevance as a guide to both policy and understanding, and are usually – nearly always – wrong in their predictions for the future, allowing for a minority, sometimes of only one, occasionally being right when ignored, because unquantifiable, events intervene.

Adam Smith is regularly criticized by many of today’s ‘scientific’ economists for his Wealth Of Nations being ‘obscure’ and difficult to read (apparently they do not appreciate 18th century literacy standards).

He was also given to drawing on empirical evidence (the quarterly prices of silver for example) that are no longer regarded as relevant, and for quoting from the statements of figures in Classical times, or, example, ancient interest rates in Cyprus and such like. That he was a competent mathematician for his times but chose not to use it to explain social phenomena is disregarded (mainly, I suppose, because facts about him are not widely known).

He sharply criticized the French Physiocrats for constructing a model of an economy that concluded that manufacturing labour was ‘sterile’ and erected an explanatory theory about this imagined fact, burdened with the handicap of it being utterly wrong.
Some modern economists (Jevons, Schumpeter, Rothard, etc.,) see Dr Quesnay’s ‘model’, and ignore the wrong policy prescriptions that Physiocrats claimed follow from it – but they praise its historic ‘scientific’ originality and denigrate Smith , as being ‘unscientific’, even a plagiarist, in some imagined race to be the ‘founder’ of economics.

Smith praised and respected Dr Quesnay; he didn’t agree with his theory of ‘sterile’ labour, a theory today that re-appears in the absurd idea that ‘services’ are less important – even parasitic – than 'proper jobs' in manufacturing; ironically, almost the reverse error of the Physiocrats disregard for manufacturing labour, who would have had society still dependent on agricultural toil.

Today their heirs would have us toiling in the ‘dark’ mills of heavy industry, still supplying the output of the Western ‘workshops to the world’, rather than supplying the world’s high-tech design and development, and all that goes with it in consumerism, entertainment, finance, medicine, life sciences, IT, and creativity.

There are serious threats looming, particularly in funding growth without unsustainable debts, and for as long as economists are bound by their obsessions with ‘scientific’ models that try to confine into 'thin' equations the complexities of high GNP economies, with large welfare policies, always worthy, but often unfunded, then the best brains of the profession are wasted in competing ‘witch-doctorism’, rather than enlightenment.

I think Hayek is worth a second look.

A Review Worth Reading Perhaps

Enrik Jensen (professor of economics, University of Copenhagen, writes a most interesting review of several professional papers in the American Economic Review (13 July) in ‘hjeconomics’ Blog (HERE):

‘Economics as a Moral Science: Papers & Proceedings 2011’

“I for one, however, have never put much emphasis on forecasting abilities as a measure of success—a solid understanding of the past is much more important, as that can pave the way for good current policy advice in face of unanticipated shocks. Being right about the future in a pure statistical sense is not necessarily a virtue, as you may be clueless about why you were right. Hence, I have more respect for smart people that make unsystematic mistakes than dumb people who get things right every once in a while. …

… the paper by Benjamin Friedman stands out as [by] far the most interesting piece. He provides a fascinating account of how religious movements in the 17th and 18th century Europe may have influenced the thinkers of the time, in casu Adam Smith. His “Wealth of Nations” from 1779 defines many central themes in modern economics, in particular, that individuals acting out of pure self-interest (and thus potentially without any of the moral sentiments central to Smith’s 1759 book), under the right circumstances can result in a mutually beneficial situation. This “just” requires a little help from the “Invisible Hand”. Friedman sees this thesis as one that was facilitated by religious movements of the times whereby the predominant orthodox Calvinism is gradually phased out. The orthodox Calvinism considered individuals as being utterly depraved and in vicious pursuit of self-interest. Moreover it preached predestination setting aside any role for human choice, and finally, serving God was the only reason for life. Instead, the opposing Protestants would believe in the goodness of man, the ability of human action to play a role for outcomes (and for who will be saved, after all, this is about religion and salvation). Finally, Protestants believed that human happiness was important; not just that of God.

Friedman notices that during these times, various fields were much more intertwined than today. Therefore, these religious debates and movements may very well have had an influence on Smith (even though he was not religious). Moreover, since many of the people shaping the development of the economic sciences were out of religious movements, Friedman argues that the religious movements of the times have had influence not only on economics previously, but also to present day. As he notes, most modern economist avoid models where initial conditions affect final outcomes. This could be consistent with the passing of predestination as a strong religious belief. In the end it demonstrates that economics is a moral science even though many do not appreciate or notice it.
Friedman has several interesting thoughts and I close by quoting from his ending paragraph, which, of course, nicely sums up his points.

Critics sometimes complain that belief in free markets, not just by economists but among ordinary citizens too, is a form of religion. It turns out that there is something to the idea—not in the way the critics mean, but in a deeper, more historically grounded sense (p. 170).

So, pick up the issue and check your own moral sentiments.”

Comment
My short extracts are selected from the themes with which I mostly agree.

I have long suspected the hubris of claiming ‘forecasting abilities’ for economists. True, a minority of the profession have made more than nice livings from selling their ‘forecasting abilities’, or what passes for the same, inspired guesses, and not a few have failed the ‘two-handed economists’ test, as described by the more wizened and, I dare say, more cynical among us.

As often I have commented on Lost Legacy that ‘a solid understanding of the past is much more important, as that can pave the way for good current policy advice’.

Adam Smith’s historical approach best exemplifies this approach. His Wealth Of Nations, developed from his ‘Lectures On Jurisprudence’ [1762-3] 1983, which he gave at Glasgow from 1752-1763, demonstrate clearly his backward, not forward, looking political economy. According to a document, now lost, in the possession of Dugald Stewart in 1793, Smith also gave some parts of these ideas in his lectures in Edinburgh, 1748-51. Smith hardly ever made firm predictions about the future. That was something only within the competence of future generations.

Smith’s singular prediction about the future was in reference to the heirs to the British colonies in North America, then on the verge of a rebellion that would propel in a few years to the founding of the United States:

‘From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government fro an extensive empire, which they flatter themselves will become, and which, indeed seems very likely to become, one of the greatest and most formidable that ever was in the world’ (WN IV.vii.c.75: 623).

He became more specific two pages later:

‘Such has hitherto been the rapid progress of that country [North America] in wealth, populations and improvement, that in the course of little more than a century, perhaps, the produce of America might exceed that of British taxation’ (WN IV.vii.c.79: 625).

This was a modest prediction in the event, but Smith’s recommendation of parliamentary Union, with American elected MPs in the British Parliament in proportion to their proportion contributed to British taxation (a version of ‘no representation without taxation’) failed to get a hearing in either Britain of the Colonies, and George III’s demands for everything led to him getting nothing.

‘ “Wealth of Nations” from 1779 defines many central themes in modern economics, in particular, that individuals acting out of pure self-interest (and thus potentially without any of the moral sentiments central to Smith’s 1759 book), under the right circumstances can result in a mutually beneficial situation.’

Benjamin Friedman misreads Adam Smith in this regard. Smith’s WN is perfectly compatible with his other great work: TMS.

Self-interest for Smith was not a synonym for ‘selfishness’ and is not separable from moral sentiments. Both books work together. They were revised in 6 editions each and Adam Smith was not so careless as to continue to edit two mutually inconsistent master works oblivious of a blatant contradiction as was evident apparent only to German scholars, who were oblivious of his yet to be discovered student notes of his Lectures On Jurisprudence, discovered in Oxford in 1895 (and edited and published by Edwin Canaan in 1896 (Oxford University Press). Smith, of course taught both subject in tandem at Glasgow University. If such an error existed, some of he brightest students would have interrogated him.

As I have shown elsewhere*, Smith is emphatic that one can only realize one’s self-interest by addressing the self-interest of others with whom one necessarily transacts to acquire what we want (WN I.ii.2: 26-7).

‘This “just” requires a little help from the “Invisible Hand”. Here I forego an opportunity to take Benjamin Friedman to task on repeating this blatant modern error on Smith use of the invisible hand metaphor (see numerous earlier postings on Lost Legacy).

What is most interesting, however, is Benjamin’s ‘fascinating account of how religious movements in the 17th and 18th century Europe may have influenced the thinkers of the time, in casu Adam Smith.’ I would be most interested in reading this paper, which observes that:

‘The orthodox Calvinism considered individuals as being utterly depraved and in vicious pursuit of self-interest. … Moreover, since many of the people shaping the development of the economic sciences were out of religious movements, Friedman argues that the religious movements of the times have had influence not only on economics previously, but also to present day.’

Benjamin concedes that Smith ‘was not religious’ (a view I share: see my forthcoming article, The Hidden Adam Smith in his Alleged Theology in the forthcoming Journal of the History of Economic Thought, September, 2011).

I only observe for now that as most university educated persons tended to conform, at least outwardly despite their private views, to Calvinism in the four Scottish universities and to the Church of England in the two English universities, it was inevitable that many authors were nominally ‘out of religious movements’ without necessarily agreeing with their more imaginative precepts, as represented by the zealots in the Churches.

I think that Benjamin’s paper deserves greater scrutiny and I intend to follow it up when able to access a university library.

* Kennedy, G. [2008] 2010. ‘Adam Smith: a moral philosopher and his political economy’, 2nd edition, Palgrave Macmillan, London.

Postscript"

Warren Samuels [a distinguished historian of economic thought] in his reflections on Veblen in the Journal of Economic Issues (1995) writes:

"Veblen was the great demystyfier. He emphasized that human arrangements are in a process of Darwinian evolutionary flux, without ultimate ontological causation, meaning, or normative status."

"The reason why Veblen provided no blueprint for the future, aside from some relatively innocent but informed speculations, is that he believed that the future would have to be worked out, that one could not set it forth once and for all time. Veblen was a true existentialist, pragmatist, instrumentalist, and evolutionist; the world of future would have to be made by those who applied their tests of workability and so on, not by some armchair intellectual."

From Sumitra Shah, a fellow Historian of Economic Thought.

Comment
I agree with Samuels on Veblen. Predictors are the modern equivalent of witch doctors. Like war plans - they last to the initial contact with the enemy.

A Tale of Two Bottles

Dennis Behreandt writes in Moral Liberal HERE:

‘Congressman Paul Ryan Sips Wine, Liberals Are Outraged’

‘As a result, to paraphrase Adam Smith, though in each case the people engaged in any given transaction only seek to improve their own lots in life, the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’

Comment
Before this paragraph, Dennis Behreandt writes a brilliant dissection of the moral outrage of fellow diners, one of them an economist, no less, who are outraged that Congressman Paul Ryan (GK: Who is he?) and two friends consumee two bottles of imported French wine at $350 a bottle while there are poor people in the USA not present at the restaurant. But the ‘outraged’ economist and her partner are also present in the restaurant! (But drinking water though presumably eating the expensive food).

I have no quarrel with Dennis Behreandt’s dissection of the economics of the purchase of expensive imported wine – a classic reminder of the real benefits to society of such production processes and trade between countries.

However, I balk at the assertion – wrapped in a ‘paraphrase’ – that the “invisible hand” of the economy works through these transactions to improve the lives of countless others.’ Economies work to that end, not ‘invisible hands’!

Also, that is not what Adam Smith actually said. In his single example in which he used the metaphor of ‘an invisible hand’ in Wealth Of Nations (see Book IV, chapter ii, paragraphs 1-9, pp 452-6), he described how some, but not all, merchant traders preferred to invest locally in ‘domestick industry’ rather than send their capital abroad in the ‘foreign trade of consumption’ and that it was their ‘concern for their own security’ (today we call it their ‘risk aversion’) that led them to do so. That insecurity was the object of ‘an invisible hand’ leading them to act thus!

Now metaphors, taught Smith, are used to ‘describe in a more striking and interesting manner’ their objects (i.e, what they are metaphorically representing). It was their ‘insecurity’ that led them to invest locally, not the ‘economy’ that ‘led them’, because multiple motives are at work on individuals in an economy - not everybody is ‘insecure’ to the same degree and many of them do engage in foreign trade (hence, the French wine bottles in fancy in DC restaurant at $340 a bottle).

The economy exists and ‘insecurity’ exists in the perceptions of the insecure merchants – THERE IS NO ‘INVISIBLE HAND’ IN THE ECONOMY. To assert that there is an invisible hand misreads Smith’s meaning.

It is also nonsensical of Smith’s meaning because the economy consists of myriad people, not all of them sharing the same ‘insecurity’ of the example provided by Smith! Many merchants did and do invest abroad, despite the insecurity felt by some others. What ‘invisible hand’ leads them to contradictory actions? Where is the term for the invisible hand in any of the equations of the mathematical models of modern economists?

Merchants, of all kinds, act from many motives not because of invisible hands but from their noting the very visible prices that are absolutely necessary (and, indeed, absoliutely sufficient) for a market to form and do its work.

There is no mystical invisible hand at work. It is not the ‘hand of god’, etc., that drives markets. Prices are sufficient, and Adam Smith outlined a plausible analysis of how prices work in an economy (albeit wrapped in the fairly cumbersome language of ‘natural’ and ‘market’ prices) through ‘supply’ and ‘effectual demand’ in Books I and II of Wealth Of Nations, without mentioning anything about ‘invisible hands’.

Most modern economists dismiss concerns about their misrepresentation of Adam Smith’s use of the invisible hand metaphor. They have adopted an invented ‘useful’ meaning to the restricted meaning that Smith applied, and they ignore not only what metaphors mean, but also what Smith actually confirmed in Book IV of Wealth Of Nations and what was the role of metaphors in literate English (and ancient Latin and Greek) in his Lectures on Rhetoric and Belles Lettres, [1763], 1983, p 29).

But still, read Dennis Behreandt’s interesting piece (follow the link). It does not need a myth about invisible hands to be an excellent exhibit for the benefit of markets.

Journalists and Professors Should Check their Sources

Melissa Fyfe writes in the Age (Melbourne Australia (HERE)

‘Degrees of separation in a heated debate’
Grattan Institute's chief executive, Professor John Daley, argues that:

‘The harder sell politically is a market mechanism, such as a carbon tax. "The problem of the invisible hand," Professor Daley says, using a free-market phrase coined by Adam Smith (father of modern economics and subject of much Liberal Party genuflection), "is that it's also politically invisible".

Experience here and overseas shows markets produce unforeseen, surprising and sometimes boring ways to cut pollution.’

Read more: HERE

Comment
Journalists, if not professors, should check their sources.

Adam Smith did not ‘coin’ the phrase, ‘the invisible hand of the market’. That is a 20th-century invention originating in an oral tradition at Cambridge University (Professor Pigou and others), and perhaps at Chicago too (Paul Samuelson’s tutors), and popularised by Oscar Lange (a Marxist, supposedly favoured by Stalin) in his book, ‘On The Economics of Socialism’, 1936), and Samuleson’s Economics: and introductory analysis’, 1948.

Adam Smith did not mention anything about ‘the invisible hand of the market’.

Nor, in fact, did he coin the metaphor of ‘an invisible hand’. It was already widely popular among the literate (authors and preachers) before Smith was born. He only used in twice: once only in Moral Sentiments (1759) and once only in Wealth Of Nations (1776), and on neither occasion were markets mentioned (nor supply and demand, prices, or costs).

Adam Smith on Humanity and Our Dinners

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‘White Bear’ posts at the Centre for Contemporary Arts HERE:

‘Invitation: Farewell to the free market! (July 22nd)

”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. We address ourselves not to their humanity but to their self-love and never talk to them of our own necessities but of their advantages.

Adam Smith in ”An Enquiry Into the Nature and the Causes of the Wealth of Nations” from 1776
So, what Adam Smith seems to say is, that when it comes to supplying dinner to all of Scotland, humanity is an over-estimated idea and thus, It was not just our humanity, that in 1776 was supposed to make sure that there would be dinner enough for all of Scotland, but rather perhaps each our own selfinterested beast.”

Comment
It’s not clear what is the point that 'White Bear' is making?

Is it that feelings for ‘humanity’ would be enough to feed a population, especially one as large as lives in Scotland?

Is it that something other than voluntary efforts by people, or compulsory efforts by some ruling force would be sufficient (and sustainable) to feed the population?

Is that there is some hitherto hidden means could be used to replace the ‘toil’ necessary to collect, process, and provide as rations the daily food requirements of Scotland – much as the fabled bees and ants manage, along with birds, fish and bacteria, etc., too, that achieve their sustenance without ‘markets’ or dictatorship? Manna from heaven, perhaps?

Or the lilies in the field? Or someone with ‘loaves and fishes’?

Adam Smith was not trying to change the world. That was a call to action instigated by Karl Marx, with disastrous results for those innocents his followers ruled with inhumane means.

No, Smith was describing what actually happened in the Scotland he knew. He also noted that many people didn’t do as well in the food stakes as they might have when in need of their dinners. He advised them to persuade the ‘butcher, the brewer, and he baker’, by appealing with their offer to purchase their dinners (a remark about the diet of 18th-century Scots) to appeal to the self-interest of the said ‘butcher, brewer, and baker’, who afforded their own dinners by selling ingredients for the dinners of others and using that income (net of their costs) to buy what they needed – food, clothing, shelter and whatever. In short, prospective diners should appeal to the self-interests of the sellers, and not their own self-interests, when bargaining for their dinners.

If all people relied on benevolence alone for their needs, they would surely be disappointed. Who would toil? Yes, of course when social relations, including the toil that produces food, breaks down, as it does occasionally (though in some places more regularly than others), and famine occurs, it is incumbent on people of humanity, to donate what they can spare to supply emergency food, shelter, and medicine to those afflicted by dreadful calamities.

But a permanent famine across everywhere on Earth would be impossible to mitigate by benevolence and feelings of humanity alone. At present, the necessaries of life are available to the majority of the world’s population, and famine relief is possible for a small minority.

For the rest, Adam Smith, a ‘man of humanity’ indeed, was right.

Watch the Use of Careless Thinking

B.P. Terpstra, writes (10 July) on Weekend Libertarian (HERE):

‘Too Posh To Push? Adam Smith On Marriage Politics’

‘Adam Smith (a Christian-sounding deist) frequently cited the Bible (“Abraham weighs to Ephron the four hundred shekels of silver which he had agreed to pay for the field of Machpelah” –p. 19) and unashamedly talked of “savage nations” (I have one foot-binding Middle Kingdom in mind -p. 5).

He’d be shunned today by multicultural libertarians and socialists alike for talking about social values because they have nothing to do with economics, according to our modern politically-correct elitists. But of course they do. By way of example, Smith wrote “Marriage is encouraged in China, not by profitableness of children, but by the liberty of destroying them. In all great towns, several are every night exposed in the street, or drowned like puppies in the water. The performance of this horrid office is even said to be the avowed business by which some people earn their subsistence” (pp. 45-46).

Horrid, indeed. Like Jesus, Smith wasn’t afraid to make statements linking wealth to morality. Even rich European ladies who were too posh to push are mentioned in The Wealth of Nations. As an example, consider this view (p. 50): “Poverty, though it no doubt discourages, does not always prevent, marriage. It seems even to be favourable to generation. A half-starved Highland woman frequently bears more than twenty children, while a pampered fine lady is often incapable of bearing any, and is generally exhausted after two or three. Barrenness, so frequent among women of fashion, is very rare among those of inferior station. Luxury, in the fair sex, while it inflames, perhaps, the passion for enjoyment, seems also to weaken, and frequently to destroy altogether, the powers of generation.”

… Smith’s magnum opus reminds us to always think about economic and social matters together. Surely the family is the foundation for all economic thought and can’t be ignored.

Comment
Adam Smith was born (1723) and brought up in a Calvinist home by his religious mother, whom he adored. As a sickly child she nursed him from birth until he was 14, when he left home in Kirkcaldy and matriculated at Glasgow University (1737). He left home again in 1740 and went to Balliol College, Oxford for six years. He did not return to Kirkcaldy until 1746 (which was too far in those days to ride to Kirkcaldy and back in his two weeks annual vacations).

This long break coincided with his own philosophical studies (including David Hume’s Treatise of Human Nature, 1739-40) and his drift away from the Christianity of his youth. His unpublished Essay on the History of Astronomy (1744-50), published posthumously in 1795, shows his suspicions of all religious beliefs in ‘supercilious superstition’. The last, 6th (1789) edition, of his ‘Theory of Mortal Sentiments’ shows clear evidence of his lost beliefs in Christianity in all its forms, compared to the 1st edition (1759).

In it he made numerous amendments to the religious certainties that he was obliged to state in its earlier editions because of the domination of Scottish social life by the zealots of the Presbyterian Church of Scotland in those years. These changes amount to a substantial dilution in only one direction – to repudiate the Christian doctrine of ‘revealed religion’. Neither did they replace these ideas with either Christian Deism or Christian Providence (the latter when mentioned refer directly to pagan ideas, not his own). [See my paper, ‘The Hidden Adam Smith in his Alleged Theology’, Journal of the History of Economic Thought, September 2011].

Of course he ‘frequently cited the Bible’. In the 18th century most of his readers were familiar with the Bible and using Biblical references did not signify agreement with ‘revealed religion’, any more than references to Shakespeare infer close familiarity with all of his works. In particular, Abraham dealings with Ephron for ‘four hundred shekels of silver’ illustrates the ancestry of money dealings in ancient commerce (he also quotes from the Bible, interest rates of ‘48%’ in Cyprus).

Be wary of jumping to conclusions when reading 18th-century authors. Smith taught young boys (14-17) at Glasgow University, (1751-64) from which lectures he wrote ‘Moral Sentiments’. All his students came from Christian homes in Scotland, England, and Ireland, and undoubtedly knew their Bibles. If I quote references to the News of the World, it does not follow that I am in agreement with it!

Of course, Smith ‘unashamedly talked of “savage nations”’. His discourse reflected the world he lived in, not the world over 250 years later. I attended University in the 1960s when brave women were defying the racial discrimination in the USA enforcing where they could sit on buses.

The title of this piece is quite insensitive: ‘Too Posh To Push’ and is too close to recent events here in Edinburgh. My daughter last week had to go though a caesarian operation to save her baby (and herself), from otherwise certain death. It had nothing to do with being ‘too proud’ (or ‘too posh’). Fortunately, the baby (3¼ lbs) has survived so far and the mother is recovering. Watch the use of those too cute political headlines. Thank goodness, in the UK we have a Nation Health Service that does not discriminate on lack on ‘poshness’, nor on income – its services are free to users, and paid for from our taxation.

Yes, ‘Smith’s magnum opus reminds us to always think about economic and social matters together’, and we should watch how we address sensitive issues. And yes, ‘the family is the foundation for all economic thought and can’t be ignored’, and I am glad that by my daughter by taking urgent action, I have a new member in it who might not be here otherwise.

'Neoliberalism' and Adam Smith

James Morrell and Nikki Larder (HERE):
present the abstract of their new paper:

“Invisible Hands: A Critique of Neoliberal Development“

“Neoliberal development theories are based on the classical economic theories
of Adam Smith and free market economics. In his book “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776, Adam Smith outlined the detrimental effects that government intervention had on economic growth. Smith argued that the most conducive approach to economic growth was to de-regulate trade and allow the “invisible hand of the market” to set prices and guide resource use. By removing government regulation and creating “free” markets, competition amongst firms would ensure the best prices for labour and goods which would in turn positively contribute to greater wealth for all citizens (Willis, 2005 p.33). In the early 20th century, the classical approach to economic
development was challenged by some theorists, who argued that some forms of government regulation and intervention were good for the economy. John Maynard Keynes argued that government spending on infrastructure and intervention in markets to promote investment, would positively contribute to economic growth and would avoid large market crashes such as the 1929 Wall Street crash. However, this understanding of national economies lead to large, unmanageable governments which were largely abandoned in the late 1970‟s in favour reverting back to free-markets and de-regulated economies. Today, the neoliberal ideology has gained substantial traction globally, with many nations adopting it in
their approach to development.”

COMMENT
Where exactly in his book, “An Inquiry into the Nature and Causes of the Wealth of Nations” published in 1776’ did Smith argue ‘that the most conducive approach to economic growth was to de-regulate trade and allow the “invisible hand of the market” to set prices and guide resource use’?

Adam Smith never argued that there was an ‘invisible hand of the market’. That is a myth from the post-war decades following on an oral tradition in Cambridge (England and Chicago, perhaps Harvard too) and the popular textbook by Paul Samuelson, ‘Economics: an introductory analysis’ (1948). It had nothing to do with Adam Smith. He used the IH metaphor to describe ‘in a more striking and interesting manner’ the ‘insecurity’ of some, but not all merchant traders, who considered the ‘foreign trade of consumption’ too risky for their capital and preferred ‘domestick industry’, while others positively relished foreign trade, and the rest invested locally for other reasons. He did not mention markets.

Is it correct to say that Smith was opposed to ALL ‘government regulation? That too is a gross exaggeration. He favoured regulation of aspects of the banking system and banks (much as there were regulatory ‘firewalls’ in buildings to protect the public; government regulation and controls of the mint, the post, local government services, the creation of partially publicly-funded natuional education of labourers’ children in the ‘little schools’ system in England in every parish (that had worked fairly well in Scotland since the late 16th century), he favoured government regulation of the weights and measures used in daily market transactions, and government regulation of ‘quality stamping’ of certain products, including the assay offices. And he also favoured government investment for larger-scale projects (bridges, roads, harbours, street lighting, pavements, town refuse and safety) too expensive for private capital, but which improved commercial facilities and also had personal benefits.
He even suggested that governments fund and act to deal with ‘loathsome’ diseases like leprosy (the beginning of public health regulations?). Lastly, he even favoured organized physical exerices and competition to improve the health – and military capabilities of the general population. These are all explained in Book V of Wealth Of Nations.

Of course, he had no views of the 1929 slump or ‘Keynes’ ideas or ‘neoliberalism’. Smith died in 1790.

Morrel and Larder appear to have linked Adam Smith to their views of Neoliberalism' more from ideology than historical facts.

Praised and Criticised In Equal Measure

Zach Vaughan writes in Wandering Reveries somewhere in Texas (HERE):

A Libertarian in Leftywood writes in L.A.Liberrty:

‘The Invisible Hand: What Is it?’

‘It’s probably not what you think it is. The only mention of the invisible hand by Adam Smith in the Wealth of Nations occurs in Book IV, chp. 2, paragraph 9:

"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

From this single mention, an entire mythology has arisen about the invisible hand and it’s role in the market. For quite some time, I’ve been reading Adam Smith’s Lost Legacy, which is a blog written by Gavin Kennedy, who spends much of his time countering the myth of the invisible hand. Today’s post addresses the invisible hand claims of the Rothbard/Mises school: Another False Attribution to Adam Smith. I recommend reading Mr Kennedy’s blog; it’s certainly given me a new, and more accurate, perspective of Adam Smith.’

Comment
An endorsement. At last!

Lost Legacy ploughs a lonely furrow and it is nice to receive evidence that somebody reads and finds in it something of value.

BUT, BUT!!

An angry Libertarian – is there any other type - (no name, that I could find) responds (HERE):

“That Cornuelle once studied under Mises does not make him part of the “Rothbard/Mises” school. To the contrary, one would describe him as primarily a neo-classical economist of a different sort entirely. One of the only Austrians who seems to ever use him with any regularity is Peter Boettke (whom that site quotes, and who tries to distance himself a bit from the Austrian mainstream).

Go ahead and perform a google search of the terms “cornuelle” and “austrian economics.” You will find that the vast majority of links are related to Boettke. If you try ”invisible hand” and “austrian economics,” it’s primarily Boettke and a couple by Peter Holcombe.

You will find no entry of Cornuelle in the Mises wiki; you will find no literature by Cornuelle available through Mises. In fact, the only mention of Cornuelle at mises.org is a letter to him by Murray Rothbard in the mid-50’s on an issue of disagreement. This is because Cornuelle was not an Austrian. Here is Rothbard himself explaining how Cornuelle very much lost his way from his more laissez-faire origins.

The fact of the matter is this: Mises, as far as I know, had never used the phrase “invisible hand.” The author’s closing paragraph attributing Cornuelle’s understanding of the invisible hand as having directly come while “[s]itting at the feet of Mises,” and taking “his teacher’s words as gospel” is at best speculative though likely a gross, irresponsible yet convenient fabrication.

I haven’t read everything Mises or all the great Austrians have ever written - this is true. But I’ve certainly read a far greater deal more than that author or you or most non-economists - and I’ve read enough to know that I’ve never come across the term “invisible hand” in any Austrian literature outside the two aforementioned economists and in historical context.
Which should be enough to laugh at the author’s opening statement of alleged discomfort. To jump from a small number of mentions to it being central to the school requires two assumptions: (1) no thinker may ever deviate from his primary philosophical course, and as such (2) any idea, no matter how little promoted by a small minority of adherents (even, with all due respect to Boettke and Holcombe, by minor players), must thus be attributed as part of the greater school of thought and even to a teacher who never said such a thing. This is, of course, preposterous.

Yes, a very small number (two, by my count - though perhaps there are other even lesser-known ones) of Austrians have sometimes used the invisible hand as a metaphor. And while Austrians may recognize Smith’s “invisible hand” as some catalyst of insight, Austrians in general simply do not subscribe to the “invisible hand” as an unseen, even magical force at work, just as they do not believe the market can ever reach equilibrium. As Mises and Rothbard and Kirzner all taught: the market is a process. It is the interactions of many using available, visible cues to make decisions. Each individual makes these decisions on his own behalf based on his own subjective criteria. Through this cooperative and competitive interplay - as results from the decentralization of an unfettered market - supply and scarcity is related, and demand and efficiency are discovered.

Perhaps this is mere nuance for those who believe an economy can be centrally planned, but the point is this: if you are to disparage the opinions and economists of the “Rothbard/Mises school” as it is so put, at least go after the opinions and economists who are actually best representative of it.”

Comment
I re-posted the critical Comments in full. They contain some valid points in controversy with which I acknowledge.

I was making a wider point, not meaning to focus solely on Mises, et al, on the IH metaphor, but wider on the approach of Mises’ people with whom I have been acquainted over the years. I purchased and read Human Action in 2005 and was not impressed with its dependence on logicality, though its structure is an impressive argument. I discussed Rothbard’s take on Adam Smith on Lost Legacy some years back, and was totally unimpressed both by his assertions (he muddled Smith on the division of labour) and by his arrogant and abrupt manner. Several people who knew and met him confirmed my impressions from my reading of his personality, evident in his writing.

Despite what ‘Angry Libertarian’ (why are ‘Austrians’ so certain and so angry?) asserts, the IH metaphor is a regular source of my disputes with those of them I have met and read about.

However, I did not mean to imply anything about what Mises views were on Adam Smith’s use of the IH metaphor. I perhaps, wrongly, linked Cornuelle to Mises school, for which I apologise, and I hope in publishing “Angry Libertarian’s” in full the correction goes some way to making amends.

I accept "Angry Libertarian's" assurances that Mises did not make assertions about Adam Smith's use of the IH metaphor, and I shall bear that in mind in future and I shall distinguished between authoritative views on Austrian economics and less-informed persons who may wrongly assert t the contrary.

I do not deliberately ‘fabricate’ ideas or associations – Lost Legacy spends a great deal of time responding to such behaviours in others, especially on the myths of Adam Smith’s use of the IH metaphor, Smith’s beliefs in ‘laissez-faire’, the ‘night watchman state’ and even his alleged ‘labour theory of value’. Nor do I accept the notion of ‘equilibrium’ (general or partial), and much of the logico-centric use of mathematics to map human interactions.

Another False Attribution to Adam Smith

Peter Boettke quotes from Dick Cornuelle in Coordination Problem writes HERE

‘What Does the Market Process Do?’ Dick Cornuelle was a student of Mises before Rothbard, before Sennholz, before Kirzner. He also devoted his work to a wider audience, and to a field not traditionally studied by economists. But he was a market process theorist and he did emphasize the adaptive efficiency of the market economy.’

‘Consider the following from Dick Cornuelle's De-Managing America (1975)

‘The economic process is usually explained in terms of profit motivation and competitive discipline, so we get the impression that the process communicates instructions like "Work hard and don't waste anything." But Adam Smith's invisible hand does much more than stimulate effort and penalize waste. It works as a master arranger or harmonizer of diverse human effort and it works without control. The invisible hand that coordinates the economic process holds neither a carrot nor a stick. It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them. ...
The free economic process shows each participant how to find his own way into a useful position in the larger mosaic. ... The way this happens in practice is illuminated by the concept of feedback ... (pp. 85-86)’

Comment
I have long been uncomfortable with some supporters of the Mises' organization who have bought into the myths of the so-called ‘invisible hand’ as attributed to Adam Smith.

Dick Cornuelle joins my short list of people to be wary of:

‘But Adam Smith's invisible hand does much more than stimulate effort and penalize waste… The invisible hand that coordinates the economic process holds neither a carrot nor a stick. It is a signaling hand, important mainly for the kind of directions it provides and the way it communicates them.’

It does no such thing. It does not exist in this form at all, and neither did Adam Smith say that it did. Markets work by visible price signals.

People in them have many diverse motives and emotions and Adam Smith’s mention of ‘an invisible hand’ shows this latter point clearly on the single occasion in which he used the IH metaphor in Wealth Of Nations (Book IV, Chapter 2, paragraphs 1- 9).

He refers to those merchants who prefer to trade locally rather than risk their capital abroad, which they perceive is more risky than investing it in ‘Domestick industry’. He mentions this inhibition three times in the crucial paragraph 9 in which the ‘IH metaphor’ is mentioned.

It is their insecurity that leads them to prefer the ‘domestick’ to the foreign trade, and he uses the IH metaphor to express this point in a ‘more striking and interesting manner’ (from Adam Smith’s own definition of the role of a metaphor in his Lectures on Rhetoric and Belles Lettres, 1763 [published in 1983].

The failure of generations of economists since 1948, including, sadly, some Nobel Prize Winners, and also many of the brightest of their colleagues, to recognize the simple truth of what Adam Smith actually said is truly remarkable.

Instead a complex myth has grown about the IH metaphor and lumbers our understanding of how markets actually work, adorned with mythical qualities close to the metaphysical agencies of genii and fairies – even the ‘hand of God’.

One critical believer found portents of ‘Adam Smith’s invisible hand’ in the Tamud of 2,000 years ago! Whatever my critic found, it had nothing to do with Adam Smith’s use of a simple, and in Smith’s time, popular 17th-18th century metaphor.

Dick Cornuelle is probably innocent. Sitting at the feet of Mises, he was bound to take his teacher’s words as gospel. It still remains a myth when attributed to Adam Smith by Mises or anybody else.

Back To Business

Richard Wade Hunter Marr, a songwriter in Los Angeles quoted (HERE) by Duane Roggendorff:

"It is time to choose something different. The "God of Economics" which we started worshiping with Adam Smith's declaration that the "Marketplace" is led by an "Invisible hand," is the most bloodthirsty of all man-made myths!”

Comment
As “the most bloodthirsty of all man-made myths!” it may be news to his readers that it is a myth that had nothing to do with Adam Smith. He never said anything so silly as the market is ‘’led by an invisible hand”.

The market consists of visible prices for things at which some sellers are willing to supply them and some buyers are willing to buy them, as set out in Books I and II of his book, Wealth Of Nations (1776).

There is no mention in anything that Adam Smith wrote that mentions markets in relation to his single use of the metaphor, ‘led by an invisible hand’ (in Book IV, chapter 2).

Nor was it used in the other single use of the metaphor of ‘an invisible hand’ by Adam Smith in his other work ‘Moral Sentiments’, published in 1759.

There are, in fact, two myths at work in relation to the metaphor of ‘an invisible hand’.

First myth, that Adam Smith used it in relation to markets; he didn’t.

Second myth, that such an entity actually exists in markets; it doesn’t.

Both myths originated, initially, in the later 19th century (Smith died in 1790) and grew, at first, among some economists in 20th century in academe (Cambridge, England) and later in Chicago, USA). The myths ‘took off’ from the 1940s, primarily by Paul Samuelson – in his highly successful textbook, Economics: an introductory analysis, 1948, McGraw-Hill – and then by imitation by other authors in lectures, speeches, other textbooks, professional articles, and lastly by constant repetition by graduates in the media, politics, PR, and everyday conversations through to today. Samuelson’s famous text published its 20th edition in 2010 and 5 million copies later.

This may be a quote from a non-consequential source to High Academe and those professional economists and philosophers, with whom I have debate, the meaning they attribute to Adam Smith’s use of a popular 17th-18th century metaphor, I readily confess, to little effect, so far.

They listen, mostly politely – sometimes a trifle tetchy – but always (so far) with studied indifference.

The IH metaphor is too ‘neat’ and too ‘convenient’ for them to separate entirely from the myth that it was conceived (indeed, on occasion, that it was ‘invented’, ‘conceived’, or even, ‘first applied’) by Adam Smith. Apparently, my pointing out the historical truth is a sign of my taking the ‘romance’ out of philosophy and economics.

Possibly, but the same economists claim to expound ‘science’; I claim a more humble role: to present the historical facts and to try to restore Adam Smith’s lost legacy.

The result of the libel on Adam Smith’s legacy is that the 21st century believer in the myths as peddled by Academic authorities, is that a Richard Wade Hunter Marr, a songwriter in Los Angeles a songwriter in Los Angeles, spreads emotive anti-market ideas that influence those who listen to his songs (joining the rest of those who turn against markets in favour of I know not what, but certainly do not wish to try).