Wednesday, March 21, 2012

Adam Smith on Speculation

“Popular Terrors and Fears: Adam Smith on Speculation as Witchcraft”

The Street-Wise Professor (6 March) HERE complains about Adam Smith's opinions:
Popular Terrors and Fears: Adam Smith on Speculation as Witchcraft”

In a post earlier this evening, I said that anti-speculation frenzies dated from the 19th century. But they in fact date back much further. In Book IV, Ch. 5 of Wealth of Nations, Adam Smith analyzed the irrational attacks on commodity speculation:

“The popular fear of engrossing and forestalling [types of speculative activity outlawed in England] may be compared to the popular terrors and suspicions of witchcraft. The unfortunate wretches accused of this latter crime were not more innocent of the misfortunes imputed to them than those who have been accused of the former. The law which put an end to all prosecutions against witchcraft, which put it out of any man’s power to gratify his own malice by accusing his neighbour of that imaginary crime, seems effectually to have put an end to those fears and suspicions by taking away the great cause which encouraged and supported them. The law which should restore entire freedom to the inland trade of corn would probably prove as effectual to put an end to the popular fears of engrossing and forestalling.”

Sadly, I think that Smith’s belief that legalizing speculation would end attacks against it is quaint, but wrong. Indeed, it appears that the reverse is true: popular terrors and fears-stoked by opportunistic politicians eager to divert blame for high prices to others-lead to attempts to restrict speculation.

But Smith’s analysis of the counterproductive effects of these restrictions does stand the test of time. It is worth a read.

It is not clear to me why the ‘street-wise professor’ thinks Smith was both right and wrong on his suggestion that demands to suppress speculation was both right and wrong at the same time.

Smith considered that fears of engrossing and forestalling were grossly exaggerated. He compared them to the outrages against witchcraft, which in Scotland had been prevalent in the 17th-early 18th centuries, and caused considerable misery and bloodshed to wholly innocent old women. The last women burned to death in Scotland occurred in 1727. It was still in living memory as Smith grew up and for long afterwards, as was the last boy executed in Edinburgh on trumped up charges of blasphemy in 1695.

Old Scotland was not a safe and happy place to live if you were old or youthfully indiscrete. Hence, Smith and others took care not to offend the ignorant forces of superstition. His example of linking the idiocy of witchcraft to the “popular [mob] fear of engrossing and forestalling” was a device to deprive them of legitimacy. Witch-hunts died out with common shocks to their outcomes and laws to that affect. He hoped for a similar outcome in laws to punish demagogues instigating popular mobs against alleged “engrossing and forestalling” (which could easily destroy the very food they sought to ‘save’).

It was an opinion. That it "stood the test of time" seems to be a sufficient endorsement of his opinion, so what is the “streetwise professor” complaining about?



Post a Comment

<< Home