Sunday, March 11, 2012

Always Remember Context

It is always important to understand the context in which Adam Smith refers to events and situations when taking quotations from Wealth Of Nations to make contemporary interpretations on what Smith wrote.

Sheldom Richman is posted (9 March) in eWallstreeter HERE

Adam Smith vs. Crony Capitalism”

“The Scottish philosopher's suspicions about business people were well-founded.”

“I admit it: I like Adam Smith. His perceptiveness never fails to impress. True, he didn’t foresee the marginal revolution that Carl Menger would launch a century later (with, less significantly in my view, Jevons and Walras), but give the guy a break. The Wealth of Nations is a great piece of work.

One thing I find refreshing in Smith is his wariness of business people. This is something we ought to frequently remind market skeptics. Smith knew the difference between being sympathetic to the competitive economy—which he called the “system of natural liberty”—and being sympathetic to owners of capital (who might well have acquired it by less-than-kosher means, that is, through political privilege). He knew something about business lobbies.

This famous passage from book 1, chapter of Wealth is often quoted by opponents of the free market:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The quote is used to justify antitrust law and other government intervention. But as has often been pointed out in response, Smith had no such policies in mind. We know this because he immediately follows with:

“It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

Prime Beneficiaries

Government should do nothing to encourage or enable attempts to limit competition. But of course government does that all the time at the behest of business and to the detriment of consumers and workers. Hampering competition raises prices for the former and weakens bargaining power—and therefore lowers wages—for the latter. Those groups would be the prime beneficiaries of freed markets.”

Sheldom Richman’s selection of quotations is fine, given the points he want to make about “narrowing the competition”.

However, he misses the historical context of Smith’s critique of the behaviour of “People of the same trade” (WN I.x.c.27 145), which refers to the “incorporated towns” where the Elizabethan Laws relating to apprentices prescribed the number of boys training to become tradesmen at any one time (two only) and restricting who could trade as a Master (all former apprentices trained in the same town). It was the law imposed by government that sanctioned the legal monopolies that “narrowed the competition”.

Like many such laws, it’s original purpose was the worthy one of improving the quality of manufactured goods by raising the quality of training for those apprenticed to a “trade”.

Also, like many worthy intentions of legislation, its original purpose was diluted over the decades that followed, because the arrangements that it created led to prolonging an outdated Medieval system of seven-year apprenticeships, long after technology had moved on, which would have justified shorter apprenticeship terms and encouraged cross-trades’ integration and innovation, but the beneficiaries – those who had endured 7-year stints of low or no wages – were motivated into opposing all innovations, even to the point of social idiocy, because they benefitted financially and in job assurance.

For example, post-apprentice tradesmen, running their small workshops, and qualified only to make carriages, were not allowed to make the carriage wheels, the monopoly of which was separately apprenticed to others on 7-year terms, though their skills in time overlapped and carriage-tradesmen were competent in manufacturing either wooden carriages or wooden wheels. This restrictive practice, as ever in similar examples even until recently (try writing a screenplay for Hollywood without being a member of the Screen Writer’s Guild) added to costs and prevented price competition that would have lowered prices and increased the market for their products.

A young apprentice-trained instrument-maker, by the name of James Watt, from nearby Greenock, a few miles to the west on the River Clyde, was refused permission by the Glasgow Incorporated trades under the Elizabethan Acts (together with the local protestant Presbytery they more or less ‘ran’ Glasgow, ) to practice his instrument-making trade in Glasgow town. Adam Smith persuaded the University Senate to hire young Watt to service the many instruments used by the professors in their teaching and research, citing the legal fact that the University was ‘outside’ the jurisdiction of the Glasgow ‘trades’ and the Town authorities, a privilege shared by all four Scottish Universities in respect of their local towns.

Young Watt joined Glasgow University, was generously provided with rooms for his work and space for a laboratory, and regularly serviced and repair the professors’ mechanical equipment (no longer sent to town for repair, so the trades lost the University’s business) and one day in 1764, as history records, he was asked to repair the University’s model Newcomen steam engine. Well, as they say, the rest is history.

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