DO MODERN ECONOMIC IDEAS REALLY MATTER?

Behind The ‘Invisible Hand’: Why Economic Ideas Still Matter (2)

Paul Frimpong, Ch.E., Chartered Economist and the founder of Young Professional Economists Network (YPEN) and also a fellow of the Bastiat Society –Ghana:

"From the first edition, we saw the development of the ‘invisible hand’ theory by Adam Smith during the 18th century.

“The theory of ‘Invisible Hand’ states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.”

… Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations" states that:

"…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... 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. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Individuals in a free market are expected, as rational beings, [to] maximize their own self-interest, and through a two way or multi-faceted interactions, the exchange of information in the markets enable each participant to be better off than when simply producing for himself / herself.

This means that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this "invisible hand" would guide market participants to trade in the most mutually beneficial manner.

Behind the ‘invisible hand’
Harvard economist Stephen Marglin argues that while the "invisible hand" is the "most enduring phrase in Smith's entire work", it is "also the most misunderstood."

“Economists have taken this passage to be the first step in the cumulative effort of mainstream economics to prove that a competitive economy provides the largest possible economic pie (the so-called first welfare theorem, which demonstrates the Pareto optimality of a competitive regime). But Smith, it is evident from the context, was making a much narrower argument, namely, that the interests of businessmen in the security of their capital would lead them to invest in the domestic economy even at the sacrifice of somewhat higher returns that might be obtainable from foreign investment. …”

… Behind the ‘invisible hand’ is just a philosophy and the belief that, perhaps, there are even profound forces that are working against the forces of demand and supply to establish a market efficiency– a ‘visible hand’.”

Comment

Regular readers of Lost Legacy will be familiar with why I consider Paul Frimpong’s general interpretation of Adam Smith’s use of the metaphor of “an invisible hand” is quite unrepresentative of Smith’s meaning.   All Smith said in fact was that a merchant concerned for the security of his capital  if he sent it abroad might instead choose to invest it ocally, which if he did, his action would add to domestic “revenue and employment”. The consequence of doing so was an arithmetic addition to the domestic economy, which he considered generally to be good outcome that was of public benefit to the community. 

The "Invisible hand"  quotation comes from Book IV of the Wealth Of Nations (p 456), which Book IV Smith described as his “violent attack” on the prevailing mercantile political eocnomy of Great Britain.  He said nothing at all about “Individuals in a free market” were “rational beings”, who “maximised their own self-interest”.

True, we can deduce that “markets enable each participant to be better off than when simply producing for himself / herself”, which is true as well as for every system by which people acquire their subsistence from nature in all previous “ages of mankind” from hunter-gathering, shepherding, farming, and exchange in markets because all benefited from the “division of labour” instead than living hermit-like and doing everything for themselves. Man depends on the co-operation of others, and always has, and likely, I venture to suggest, always will for the foreseeable future.

Whatever is meant by the “visible hand”, it does not mean that it is an antonym for the use of the “invisible hand” as a metaphor.  Like all metaphors, the “invisible hand” does not exist as an entity; it simply describes in a “more  striking and interesting manner” its “object” (see Smith ”Lectures on Rhetoric and Belles Lettres”, 1762, p. 29).  Its “object” in this case was the ‘hidden” motive in the merchant’s mind that prompted him to actions that had the intended consequences of making his capital more secure than exporting it facing the risks of sending it abroad.  But actions can also have unintended consequences too. In this case the original motivated actions of security can also add to “domestic revenue and employment”, which Smith regarded as a “public benefit”.

Some actions can have negative consequences too, such as pollution, higher prices, tariff wars and hostilities between countries. Indeed, Smith considered that the mercantile policies prevalent at the time did cause wars, invasions, large spending on wars and regime changes, let alone higher domestic prices, plus the absence of foreign-sourced products (French wines replaced by poorer quality Portuguese varieties). Whatever else it was, it was a long way from “the so-called first welfare theorem", or "Pareto optimality of a competitive regime”.

Stephen Marglin’s quoted observation that the “invisible hand” is the "most enduring phrase in Smith's entire work", is wrong and unintensionally misleading: the “invisible hand” “metaphor” was not “a phrase”, and only endures today because modern economists - in particular Paul Samuelson in 1948 - lazily picked out the phrase and have spread it around the profession since the 1960s, as if it was true. Marglin’s “observations” demonstrate that he does not understand the limited metaphoric purpose behind Smith’s use of it and his explanations are misdirected - it had nothing to do with 18th century theories of perfect competition or product distribution. 

Nor is there a “visible hand” - there are visible prices because no market can work without visible prices.  Markets have never been “perfectly competitive and state regulations are absolutely necessary. For example, Smith mentioned the need for state banking regulations and limits to interest rates, the absolute necessity for mandatory laws of justice, without which society would crumble.
Ideas matter, modern or ancient, except where they are wrong. 

ON DEMYSTIFYING ADAM SMITH ON THE "INVISIBLE-HAND"

Demystifying the Invisible Hand

Nathan Goodman posts on “Students for Liberty” HERE

[Students For Liberty has grown into the largest libertarian student organisation in the world, which includes over 800 leaders that support over 1,350 student groups representing over 100,000 students on all inhabited continents.]

“The phrase “invisible hand” can easily evoke fanciful imagery of invisible hands magically manipulating the world. So it’s no surprise that many critics of laissez-faire, particularly on the left, misconstrue the concept as a form of magical thinking or religious fundamentalism. For example, Neil Douglas and Terry Wykowski allege that “market fundamentalists imagine that the market magically transforms market participants into moral agents who mitigate self interest through the ‘invisible hand’ as described by Adam Smith.”

But economists don’t argue that markets produce moral outcomes as a result of “magic.” Rather, they argue that the institutions associated with markets produce incentives and those incentives guide self-interested individuals towards socially beneficial actions. As Peter Boettke explains, Adam Smith did not argue “that the pursuit of self-interest will automatically translate into public benefits.”  To the contrary, Boettke points out:

The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest can lead to socially undesirable options.”

[Boetttke quotes Smith’s comments on the poor teaching he expperienced in Oxford (1740-46)  compared to the lively teaching he received in Glasgow (1737-1740)].

“Boettke uses this emphasis on institutions to rephrase Smith’s invisible hand proposition as follows: “Individuals pursuing their own self-interest within an institutional setting of property, contract, and consent will produce an overall order that, although not of their intention, enhances the public good.” Under these conditions, social cooperation emerges that is a result of human action but not of human design.”

Comment

This a step forward from the Paul Samuelson's version in his famous textbook, “Economics: an analytical introduction”, 1948, and 20 editions to 2010, McGraw-Hill, which popularised the “Invisible Hand” metaphor used by Adam Smith to assert that  Smith identified “public benefits”  came from “selfish actions, which I regard as absurd, because nobody reading Adam Smith could come to that conclusion. 

Boettke also points out that “The Wealth of Nations actually has plenty of examples in which the pursuit of self-interest leads to socially undesirable options.”  I have regularly tried to quantify this statement by reporting over 60 instances in Wealth Of Nations in Books, I, II, and III where Smith specifies the cases where ‘self-interested’ actions have led to negative outcomes for the public good.  I have added on occasion that the whole of Book IV of WN is, what Smith himself described in a letter to a correspondent, as his “violent” attack against the mistaken ideas of mercantile political economy.  Nobody who reads Book IV could possibly be misled on this point, yet so few senior economists, including Nobel Prize-winners, draw the appropriate conclusion that Smith never, ever, asserted that public benefits depended on the selfish intentions of people in markets.  Public benefits may arise from certain selfish motivated actions ('proud and unfeeling' landlords in one case he gives - in the very long run - but most cases in which motives initiate actions for intended consequences are  in the daily activities of the business of life that have morally neutral unintended consequences.

The longest journey to the truth is travelled in small steps and I am grateful for signs of movement, led by Nathan Goodman quoting the talented Professor Boettek (see his textbook, Living Economics, 2012).

I am not “leftist” on Adam Smith; not am I “rightist” either. I do not buy the “laissez-faire” myth. 

Smith never mentioned “laissez-faire” once. It is also has a dubious history from the start: the french merchant who uttered the words “laissez nous faire” on behalf of his merchant colleagues, said nothing about laissez-faire for his customers.  Indeed, when mill and mine owners in 19th-century England campaigned for “laissez-faire” they were trying to stop parliament from legislating against the employment of young children in factories with rapidly moving machines that took their limbs off in accidents, and, later, for free-trade in corn to reduce prices so employers could lower wages.  Smith favoured “Natural Liberty” that applied to everybody, not just employers.

Nozik came at the “Invisible hand” controversy with the less perverse idea of “invisible-hand explantions”, related to “unintended consequences”, which Smith also articulated upon. The roots of the Nozik’s ideas are found in 17th-century ideas from Cromwell, onwards through to Adam Ferguson, a contemporary of Smith’s, who wrote: “every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”

I have observed before that the Ferguson (Nozik) passage fits neatly with Smith’s on the “invisible hand”.  Both are about the consequences of the actions of people. 

Let me explain.

Smith used the “invisible-hand” as a metaphor from his teachings on metaphors from 1748-62 (see his “Lectures on Rhetoric and Belles Lettres”). He spoke of the motives of the merchant who avoided sending his capital abroad because of his perceived risks from doing so.  His motives (hidden from view to others) “led” him to an action: invest locally.  His action had intended consequences, specifically the security of his capital (he mentions this motive four times).  In so far that his investment safely adds to his profit, his intended consequences are realised.  However, his actions may also have unintended consequences which played no part in his risk-averse motives for his actions, but neverless those actions may also cause unintended consequences.

In the merchant’s case, his actions contribute to “domestic revenue and employment”, raising both for the public benefit. (higher domestic revenue and higher employment).

The merchant did not intend this outcome, but it happened neverthess, though it was not by his “design”.

Similarly in Theory of Moral Sentiments” (TMS IV.1.10: 184-5), the “proud and unfeeling landlord” cares nothing for his labourers (serfs, slaves, tenants or whatever), but he is neverthess motivated to feed them from part of the produce they produce for him from his land. His motives are selfish in the extreme and violent overseers makes sure their master’s wishes are met. The labourers are motivated to work his land by the overseers' violence, but mainly by the need to eat, without which they and their families would starve. Thereby the motives of the landlords and of the labourers coincide in their actions.  Without food the labourers cannot work the fields and without the labourers working the fields, the “unfeeling”  landlord’s “proud” greatness would terminate and everybody would be thrown in starvation

However, their actions have intended consequences (landlords have high living standards and power; the labourers have food for their families).  Smith’s use of the “invisible hand” metaphorically “describes in a more striking and interesting manner” its “object”, namely the hidden motivations of the parties for their resultant actions.  Neither has nor needs to have any views on the unintended consequences of their actions, but nevertheless those actions have unintended consequences, because their actions “advance the interests of society, and afford means to the multiplication of the species” (TMS IV.i.10: 185).

Now I have been explaining all this on Lost Legacy since 2005, so far with moderate results. Both “Leftist” and “Rightist” friends, readers, correspondents, and listeners at seminars on the History of Economic Thought and contemporary scholars have been unimpressed so far, to say the least. But I shall carry on because I am encouraged by small signs that some scholars are moving independently towards loosely similar conclusions.

I regard Peter Boettke as moving slightly in the proper direction, i.e., towards Adam Smith’s perceptions on untended consequences.

"ON POVERT AND POVERTY TRAPS"

Tim Worstall posted (21st September) on the Adam Institute Blog HERE 

This is a thought provoking, 5 paragraph article on Poverty Traps by Tim Worstall, which I highly recommended, both as a post and as a worth your while Blog site.

“Three hundred years ago all countries were poor. Now some countries are not poor and some countries still are. It’s thus logically certain that it is possible to escape whatever poverty traps there are. For some places have done it. It’s also equally true that there must be things that prevent that economic growth from happening for some places haven’t had that economic growth. Thus we can assert, without possibility of contradiction, that sure, there are poverty traps but there’s nothing inevitable about them at all. It is possible to escape for some have done so.”

Comment

Poverty has long been with the human race, and so has the comparative well-off status of a minority of every population in history.  

Some leftist political theorists argue that little has changed since early society.  Marx called it the “class struggle” and advocated the radical changes he considered were necessary for  affluent economies to be created by design that would bring about equality.  He (and Engels) steadfastly refused to provide details of the design of the societies that would bring the promised equality about, other than the seizure of power by the proletariat in violent revolution.  Lenin transcribed that blank sheet into the necessity of an armed-vanguard of the proletariat to enforce the will of the dispossessed against the violent resistance of the bourgeosie.  Recent history has shown the awesome consequences of the implementation of the schemes of Marx, Engels, Lenin, Stalin, Mao, Kim, and assorted Eastern Europeans apparachicks, Third World “Liberators” - all dictators, and others.

The facts are evident.  For almost almost all human history per capita incomes remained stubbornly below the rough equivalent of $1 a day per person.  Some social scientists disregard these facts and find in their versions of the deep past of human history, mandatory altruism, equality (women included?), and all living within the sustainable limits of the enironment, as the common-lot of humanity, until, that is, the rise of per capita incomes in a smallish corner of North-West Europe from the 17th-18th century, driven by the re-appearance of early-types of market transactions that had largely disappeared in the collapse of the Western European Roman Empire in the 5th century and the triumph of barbarian warlords, later evolving into feudalism.

From this period in the late 15th century, per capita incomes began to rise comparatively, in historical terms, at first slowly, three centuries later, steadily and cumulatively doubling.  They continued to do so as market relations spread,  creating an unprecedented rise in living standards.  Wealth spread unequally up and down the social scale, as before, but for the universal poverty-stricken majority the evolutionary process produced the richest majority of millions that had never been experienced on earth before, since the speciation of the Apes from a common ancestor, to what became eventually, c.200,000 years ago, the Homo sapiens, who now dominate the Earth.

Moreover, billions of humans are now experiencing living standards never before experienced in terms of education, health standards, daily food consumption, high levels of the consumption of necessaries, and of conveniences, longer life spans, mobility across the planet, spending choices and such like.  If you have lived through three generations of your family you know what real austerity meant compared to your grandchildren.

Of course, these affects are unequally spread, but the point is that they are spreading across the board at an historically astonishing rate, including within the life-times of those still in poverty (consider China, India, Brazil and parts of Africa untouched hitherto by freer markets and public spending previously diverted to endemic corruption).

Of course, its not all roses, sweetness and light, and freedom from fear and insecurity, let alone freedom from endemic fanaticism and plain ignorance.  There is still a long way to go; hundreds of millions are still trapped in appalling levels of poverty, insecurity, persecution, untreated diseases, local wars, injustice, the absence of freedom in place of slavery, corruption, and such like. 

This makes the elimination of poverty the main priority.  I am convinced for all these reasons that poverty is the most important target for this and the next century, even more important than the hopeless elimination of inequality by confiscatory destruction, inevitably by violence, of the so-called 1 per cent - it'll spread much lower down the incomes scales.  

Those tens of thousands of desperately poor migrants from the impoverished and war-torn South who seek a preferred life among the ‘poor’ of the rich countries, put our relative ‘poverty’ into perspective. Few poor in the rich countries risk their lives to migrate to the poor countries.   

Dealing with poverty is far more important than inequality. 

Tim Worstall makes the point eloquently, as per usual.

READING SNIPPETS OF WEALTH OF NATIONS CAN BE MISLEADING OUT OF CONTEXT

The ‘Invisible Hand’ Is in Your Pocket

Jim Freeman in ‘The New Presence revue’ quotes from Solon HERE 

“In economics, the invisible hand is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is a metaphor coined by the economist Adam Smith. Once in The Wealth of Nations and other writings, Smith tried to show that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand.” He argued that each individual maximizing revenue for himself maximizes the total revenue of society as a whole, as this is identical with the sum total of individual revenues.”

Comment

Hold on a minute, Smith did not say that “an individual pursuing his own self-interest tends to also promote the good of his community as a whole”.  He gave many examples of individuals “pursuing his own self interests” who could and did work against the “public interest”, such as when they lobbied legislatures to impose tariffs on imports, or worse, ban certain imports all together, a not uncommon feature of politics in 18th-century Britain (or indeed since).  Such self-interested behaviours worked directly against the consumers’ self-interests, who, as a result of tariffs and prohibitions, faced higher prices of domestic produce and the absence of certain legitimately produced foreign goods altogether.  In fact, the whole of Book IV of Wealth Of Nations is a critique of mercantile political economy, demonstrating the opposite of Jim Freeman’s assertions.

In the case Smith discussed where he used the ‘invisible hand’ metaphor  (once) he discussed the consequences of investing domestic capital in the domestic economy that necessarily added arithmetically to the quantity of domestic investment and that additional domestic investment added to domestic “revenue and employment”, which was a public benefit. If all merchants followed that self-interested advice there would be few imports of goods, perhaps at lower prices than domestically protected prices.  As foreign trade can raise domestic consumption and incomes abroad, it results in slower overall growth of world economies, which curbs innovation and living standards in both economies more than necessary. Book IV if WN is Smith's polemic against the economic consequences of 'mercantile political economy' prevalent in 18th century Europe.

Now the process Smith described by using the famous metaphor is the direct link between the motives of the domestic merchant who feared the risks of sending his capital abroad and losing it because his capital once out of his sight and his direct control in foreign jurisdictions where local business practices were different to those domestically and the people on whom he trusted, were less well-known than his neighbours, it was avoidable by his refraining from foreign commercial ventures, but helped to impoverish the world economy.  

The metaphor of “an invisible hand”, as with all metaphors in English, described the merchant’s private motives of insecurity in a “more striking and interesting manner” (Smith’s “Lectures in Rhetoric and Belles Lettres”, 1762-3, page 29).  The hidden motives (risk aversion) of the merchant led him to his actions of investing locally and those actions had the unintended consequence (driven by the actions led by merchant’s motives) of arithmetically adding to domestic “revenue and employment”, and lowering "world revenue and employment".

Clearly, Adam Smith did not try “to show that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “‘the invisible hand’.  He had no such a “principle” called “the invisible hand”.  Moreover, Smith did not “coin”  the “invisible hand” neither as a metaphor nor  as a “principle”.  The metaphor was in fairly common use in the 17th and 18th centuries, mainly, though not solely in theological contexts.  It also appeared in Shakespeare, poetry, general fiction (Defoe), political speeches and philosophy.

Jim Freeman, of Solon, should think again and try to cease being influenced by modern 20th and 21st century economics and modern politicians sharing an ideology. His article in Solon is quite long (12 pages +) and it makes similar errors throughout (follow the link to Solon).

CHYDENIUS, AN EARLY PIONEER ON ECONOMIC EXCHANGE BEFORE ADAM SMITH

“Before Adam Smith There Was Chydenius” by Gary Galles, professor of economics at Pepperdine University, posts in Ludwig von Mises Institute HERE 

"On my first day back in the classroom this fall, I was reminded that entrepreneurial alertness applies to ideas and insights as well as profits.

“Since the opening chapter of the course’s economics principles text calls Adam Smith the father of economic science, I told my class that he actually had multiple precursors in the study of economics. I mentioned the Spanish scholastics as an example. And having his precursors in mind primed me to discover another one I had been completely unaware of.

“After my class, I stopped by to visit a colleague I hadn’t seen all summer. Outside his office were copies of a pre-Euro 1,000 Finnish mark note and a pre-Euro 100 Austrian schilling note that I hadn’t noticed before … on the 1,000 Finnish mark note was Anders Chydenius (1729–1803). I said, “Who is that? I never heard of him.”

"My colleague told me just enough about Chydenius (1729–1803) to make me curious, particularly in mentioning that he wrote some very Smithian things before Smith. So I took a moment to check him out. What did I find? One article described him as “Scandinavia’s Adam Smith.” A review of his 1765 The National Gain (originally written in Swedish) stated that “Chydenius published this system of economic thought about ten years previous to the publication of Adam Smith’s epoch-making work. It is peculiar to note how well the ideas of this simple Finnish country parson coincide with those of the great Scottish economist.” Another article I found said “One of the most remarkable aspects of Chydenius’ analysis is how relevant many of his conclusions are to today’s political and economic debates.” My curiosity aroused, I had to look further.

"Chydenius was a country churchman in an outlying area of Finland (then part of Sweden). He did not read English or French (and the vast majority of his work was not translated into English until recently), and so he was unaware of the enlightenment discussions taking place in those tongues. He did not found a school, nor did he attract a group of followers. He was self-taught in economic matters and had no systematic methodological approach beyond common sense. He did not seek involvement in politics or look for power, but as Carl Uhr wrote, “when, on three separate occasions, he was a member of the Swedish-Finnish Parliament, it was the demands of his conscience which drove him to publish his opposition to a number of legislative proposals which seemed to him harmful and/or inequitable.” Briefly stated, it was his response to the inequities and waste of mercantilism that motivated his interest in economics.

"In Bruno Suviranta’s review of Chydenius’s best-known work, The National Gain, he described what tied together Chydenius’s writings on political economy as “all founded on the same constant idea of freedom.” Charles Evans wrote that “he expressed a classical liberalism as radical as any penned by familiar [contemporary] liberals.” Chydenius “pointed out repeatedly that individuals engaged in voluntary exchange would be rewarded for doing only those things that their neighbors wanted them to do. If each individual is doing only what his or her neighbors want, then the commonweal is served.” In other words, “peasants left to their own devices could run the economic activity of the nation better than the nation’s best and brightest in positions of authority.”

"So what did Chydenius write that Eli Heckscher could describe as reflecting a “simple exposition of the fundamental tenets of economic liberalism,” which “might readily have achieved international fame if at that time it had been published in one of the world languages”?

"For example, we see in The National Gain (1765) some of Chydenius’s insight in his critique of government efforts to “improve” the national economy by favoring some industries over others. Of course, it is impossible for the government planners to know which industries provide the greatest good for society.

[I]t is quite unnecessary for the Government to draw workmen from one trade to another by means of laws. Nevertheless, how many Statesmen are there that have busied themselves with this … either by force or by granting them privileges. … No statesman is yet found capable of stating positively which trade will give us the greatest National Gain. … [Economic freedom] relieves the Government from thousands of uneasy worries, Statutes and supervisions, when private and National gain merge into one interest, and the harmful selfishness, which always tries to cloak itself beneath the Statutes, can then most surely be controlled by mutual competition. …

… In Rural Trade (1777), Chydenius examines the problems of government-favors bestowed on certain industries, and the resulting distortions:

Why, then, do rulers take unto themselves a power which is not theirs?… petty princes busy themselves with dabbling in matters they do not understand in order to satisfy their own or someone else’s prejudices, or in blindly following some minister’s advice.

They gather together a great many of their subjects in separate flocks and bestow favors on them at the cost of the others, and these favors they elevate into fixed privileges.

"And on the matter of the relationship between labor and private property, Chydenius notes in Thoughts about the Natural Rights of Masters and Servants (1778) that “[T]he property of the poor is hardly anything else than … freedom to labor and earn their daily bread. If this right be denied a person or be curtailed … by force … then it is clear that his freedom voluntarily to seek work and thus earn his living has been impaired, and then his constitutional guarantee of freedom loses its meaning and value …”

“I especially resonated with Carl Uhr’s description of Chydenius as “imbued … by the vision that man, in seeking his own gain by specialization of labor and by exchange under an impersonal discipline of competition, would realize … the welfare and progress of society as a whole.” As a result, he was a “predecessor [of Adam Smith] who arrived independently at a conception of the essential nature and the virtues of an economic order based on freely functioning markets.” I only wish that, a quarter millennia later, more people shared Chydenius’s insight that, in Eli Heckscher’s words, “the only path to social harmony … was by free competition … all governmental intervention in the production and distribution of goods and services redounded sooner or later to the disadvantage of the great majority of the people.”

Comment

John, a friend of mine, a professor of chemistry at Oxford (Balliol) with a keen interest in Adam Smith, drew my attention to the writings of Chydenius a few years back (apologies, unforgivingly, I have forgotten his surname).   On his prompting, I obtained a copy of the ‘National Gain’ and read it enthusiastically.  Cheydenius presents a ‘Smithian' account of an economy (market and state, before Adam Smith HERE

Typically, chattering epigones resort to hyperbole in respect of Adam Smith, making him out to be the “the first” modern economist and “founder”, “inventor”, “designer”   (etc.) of “capitalism” (a word first used in English in the 19th century by Thackeray, in his novel, ‘The Newcomes’).  Yet markets relations existed for thousands of years before Smith wrote his magnum opus, Wealth Of Nations, mainly as a critique of exisitng market relations.  North Americans love heroes, scholars should love the facts. Smith’s important role in developing the ideas of exchange relationships in human societies was more than enough to establish his historic significance without resort to Hollywood’s tinsel glitter.

ANNOUNCEMENT

Lost Legacy Readers will have noticed that I have been somewhat sparse in my posts recently.  

I regret this lapse, which primarily is caused by two unavoidable contingences.

The first contingency is that I have been working on the preparity phases of drafting and writing a new book on Adam Smith and I am about to move to the drafting of chapters phase.  This for me is exciting as it shapes my vague ideas for my third Adam Smith book. 

I started on my latest Adam Smith book a couple of months ago, and this past month I experienced what I call the ‘discovery’ of my “authorial voice” phase, which usually emerges as I try various drafting of topics and experimental ‘chapter’ themes, some several pages long.   For me, once my “voice” stage is clarified, it energises the tone and format of the writing of the text.  

The second contingency is that serious writing is up against my physio’s mandatory health regime - if stroke patients do not work at recovery of brain-muscle co-ordination, their physical decline continues. In my case, considerations of balance and too early fatigue is tackled by not sitting around at my desk for hours but of active exercise, particularly in the form of a regular target-exercise regime: twice-daily, 50 minute walks in the neighbourhood, supervised by my MapWalk app, and regular, short 15-minute walks throughout my house, circa every 50 minutes.

However, I am now going to schedule-in attention to Lost Legacy, primarily because I cannot help reading useable material daily that I wish to comment upon, from Loony Tunes materials, through to more serious travesties of injustice to Adam Smith’s legacy. I have also noticed what I think is a slightly increasing number of contributions from scholarly figures across the Net who express positive endorsements of authentic ideas of Adam Smith, quite independent of my views.  I wish to comment on these and spread the contact details when they occur.

The exercise regime shall continue. But my book will take longer, plus my co-respondence, refereeing and reviewing obligations. As these latter are usually about Adam Smith, they remain a pleasure, whatever their authors' views on Adam Smith

Gavin Kennedy

LOONY TUNES NO 102

1 

How to Kill Markets and Add to Poverty

“Assisting the Invisible Hand: contested relations between market, state and society

by Wim Dubbink and W. Dubbink.  Issue in BusinessEthics

“Modern liberal democracies are troubled by public problems in which the free market is no innocent bystander. It is therefore generally acknowledged that the market must be controlled. Assisting the Invisible Hand is an investigation into contemporary thinking on controlling the market, especially with regard to the problem of dealing with environmental issues.”

2

MYLES UDLAND on Business Insider HERE

HERE 

A Thornburg Investment Management study of "real, real returns," which was alerted to us by Cullen Roche at Pragmatic Capitalism, shows how various costs eat into your stock market returns. Real, real returns take into account expenses (the man), taxes (Uncle Sam), and inflation (the invisible hand).

3

What invisible hand regulates the free market economy?  HERE What is a free market economy/

Answer: “an economy that operates by voluntary exchange in a free market and is not planned or controlled by a central authority.”

Comment: Such an imaginary economy has never existed anywhere at any time in history.    Surely economics should be about the real-world?

4

Lloyd Randall teaches philosophy and humanities at a community college. He posts on Ethics Beyond Compliance HERE 

“Your health choked by the invisible hand of the market”

“Sometimes the invisible hand of the markets is all too apparent as it clutches us by the neck and strangles us slowly and painfully.”

5

Marshall Jevons “The Mystery of the Invisible Hand: A Henry Spearman Mystery”. Princeton University Press  HERE

http://www.periplus.com/p/9780691163130/the-mystery-of-the-invisible-hand-a-henry-spearman-mystery?path=1

“Henry Spearman, the balding economics professor with a knack for solving crimes, returns in "The Mystery of the Invisible Hand"--a clever whodunit of campus intrigue, stolen art, and murder. Having just won the Nobel Prize, Spearman accepts an invitation to lecture at Monte Vista University. He arrives in the wake of a puzzling art heist with plans to teach a course on art and economics--only to be faced with the alleged suicide of womanizing artist-in-residence Tristan Wheeler. When it becomes clear that Wheeler had serious enemies and a murderer is in their midst, Henry Spearman is on the case.”

Comment

Go on -You’ve gotta smile…

RON BAKER REALLY KNOWS AND UNDERSTANDS ADAM SMITH ON THE INVISIBLE HAND AND MORE

Ron Baker posted (1 September) this excellent,and welcome article on Linked In HERE 

Ron Baker started his CPA career in 1984 with KPMG’s Private Business Advisory Services in San Francisco. Today, he is the founder of VeraSage Institute, a think tank dedicated to educating professionals internationally.

 He writes: 

“The Invisible Handshake”

“In Oliver Stone’s 1987 movie Wall Street, the Nietzschean anti-hero Gordon Gekko proclaims, “greed, for lack of a better word, is good,” as if greed is the pinnacle of virtue for businesspeople.

This view is commonly attributed to Adam Smith’s famous invisible hand; but like most conventional wisdom, it is more conventional than actual wisdom, since Adam Smith never claimed that greed was good.

In fact, the term is properly credited to Bernard Mandeville (1670-1733), a Dutch psychiatrist and pamphleteer. In his work The Fable of the Bees [1714], Mandeville claims that “private vices are public benefits.” Adam Smith, in his mostly forgotten book The Theory of Moral Sentiments, disagreed with this, calling it “wholly pernicious” and the thesis “erroneous.”

Yet, who subscribes to the view that greed is good? Taken to the extreme, it would prevent anyone from starting a family––indeed, it would be a dagger in the heart of family life, marriage, friendship, partnership, entrepreneurship, and brotherhood.

Helplessness may be the only truly universal human experience, since all of us pass through infancy. The human race would not have survived one generation if every person acted as if he were unconnected to any other person. Most parents would die for their children, and this is not even considered heroic behavior but rather ordinary.

The Forgotten Adam Smith

Long before economics became a formal discipline, economists were known as moral philosophers. Smith wrote The Theory of Moral Sentiments, published in 1759––seventeen years before his more famous Wealth of Nations––wherein he theorized that moral sentiments are emotions or feelings––as opposed to pure logic––about right and wrong.

Taken together, these works attempted to integrate economics and moral behavior, since Smith thought there is no conflict between economic thought and moral philosophy. In the long run, the public interest depends on private virtue.

While many cite the writings of Smith as proof of capitalism’s selfishness and greed, his views were much deeper and more nuanced than simple self-interest. He dealt with human nature and psychology in The Theory of Moral Sentiments, which also studied human feelings and acts of benevolence. In the opening paragraph he wrote:

How selfish sovereign man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him though he derives nothing from it, except the pleasure of seeing it. …The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it."  ....

 [Plus so much more ... follow the link]

Comment

That is all I feel able to post in order not to trepass on Ron Baker’s copyright or risk my reputation for fair dealing.   However, I would love to publish it on Lost Legacy because it is so close to what Lost Legacy has been arguing, almost alone, for 13 years that I am resisting shouting out loud that “We are not alone”! 

If we ran a competition for the best article on Adam Smith and what he was about in the whole of that time since Adam Smith’s Lost Legacy, Ron Baker would win it hands down.

So I urge readers to follow the link above (it worked 15 minutes ago) and see how close Ron Baker is to my interpretations of Adam Smith.

Naturally, I have some small caveats (I’m an incureable scholar on details!) but they do not alter my judgement of Ron’s achievement.    

ADVICE ON SCOTTISH INDEPENDENCE FROM TEXAS: THANKS BUT NO THANKS

Bryan Glass, a lecturer in Modern British Imperial History at Texas State University writes (3 September) HERE  

“An independent Scotland would have to look to Adam Smith, not socialism”

“We are now barely two weeks away from Scotland’s referendum on independence. According to the latest polling, the No camp’s lead is disappearing fast. A Yes victory is becoming a realistic possibility. Yet the main argument in favour of independence that the Scottish population is threatening to accept is fundamentally flawed. It promises that state intervention can be maintained in an independent Scotland, and even increased through extra borrowing.”

Bryan asks :“how would Scotland survive after independence if the government is promising to continue offering Scots the same level of NHS spending, free prescriptions, free university and state pensions; not to mention a new proposal for free childcare? Where will the money come from to subsidise such high levels of spending? …

Smith holds the key

There’s no doubt that Scotland could be successful as an independent country, but the idea that there will be tons of money lying around to subsidise all of the social-democratic programmes promised by the SNP is pure fantasy. The Scots would be wise to turn to the thinking of one of their greatest minds, Adam Smith, and his magnum opus The Wealth of Nations when trying to build their new state.

If Scotland wants to survive and not come back begging the United Kingdom for a second chance at union, socialist ideology is not the answer. Hard work, enthusiasm and how the Scots embrace the free market will determine whether an independent Scotland succeeds or fails.

There must be a realisation that with statehood come sacrifices in terms of public expenditure. If the Scots are unwilling to budge on their public spending they must be open to creating as innovative and dynamic an economy as possible to feed this need for social welfare.

But if the economy takes a while to adjust as issues such as the currency used and EU membership are worked out, will Scotland spend itself into a level of debt from which it will never recover? That would lead to a flight of both capital and Scotland’s brightest minds, which are needed now more than ever."

Comment

One reason for me only commenting on the politics of the country I vote in is neatly illustrated by Bryan Glass above. Unlike in Texas, Scottish voters do not equate welfare state legislation, or state-funded, health provision with “socialism”, which to voters here smacks of ‘tea party’ extremist rhetoric.

Adam Smith supported the Union during his life-time and opposed Jacobite followers of the Stuart claimants to the UK monarchy as opposed to the Hanovarian Monarchy that successfuly took over the united Kingdoms of Scotland and England. From the Union of the separate parliaments in 1707, English foreign policy withdrew its trade restrictions on Scotland, brought it within the terms of the English Navigation Acts that policed trade with the Colonies in North America, and formed a United customs union. 

I should think most personages concerned with economic development at the time would have supported the Union.  However, that in itself does not mean that Adam Smith should be seen as an implicit advocate of the Union being set in stone for ever more, or for him to also support a UK withdrawal from the EU in an “In-OUT” referendum, which is scheduled to be next on the London Conservative and Unionist Governent’s agenda in 2016.

Being closer to the Scottish Independence debate than Bryan Glass, I know of no significant voices in the ‘Yes’ campaign who equate independence with forming a new socialist state or of irresponsibly financing a bloated welfare state. This latter experience was a feature of the last Labour Government (Prime Minister Gordon Brown and Chancellor Darling - both of whom are prominent leading activists in the ‘No’ campaign). 

Conservative Party ‘No’ activists intend that the UK will spend £100 billion on modernising the Trident submarine fleet and its Command and Control systems, for which there are no targets, can never be used, except to end civilisation, and is a waste of scarce resources, plus the other billions it intends to spend on future, even imminent, conventional wars in the Middle-East.  Scotland’s 10 per cent share of these UK spending plans could be put to better use in an independent Scotland.

Adam Smith advised that defence against invasion was a government’s ‘first duty’, not that it had a duty to invade other countries by participating in dynastic wars between competing European royal households.  The crumbling Royal dynasties are gone, and the war on terror is the direct result of, albeit well-intentioned, interventions in foreign countries and cultures, that have unintended but forseeable consequences, as Adam Smith might have put it.

We are well aware in Scotland of the historical significance of Adam Smith and of the details of his life and of his works. Bryan Glass may not appeciate these facts fully but nothing he writes above on the Scottish Referendum suggests to me that we should do other than vote YES.

ANNOUNCEMENT (UP DATE)

Announcement 2a

Good news! 

Having wrestled most of the day when I wasn’t out walking for my daily dose, my other daughter came round to pick up the children and I mentioned my computer problem.  She slipped out of the kitchen and came back minutes later to say it was “fixed”.

And so it was! So I may be back to 'normal' tomorrow. 

To be blessed with one computer literate daughter is a comfort.  But two? Now that’s a blessing indeed.  And that’s before I mentioned it to my son.

Gavin

ANNOUNCEMENT

Announcement

My new Apple system with wireless is not functioning.  Installed by my tech wizard-ess (?) it broke down the day after she embarked on her 2- week honeymoon in Mauritius.

Hence posting is going to be restricted.  I have several letters to respond to, plus some papers to complete.

Moreover, I have just started writing the first chapter of an exciting new book on Adam Smith…

For now I am using an old laptop, with difficulty to match.

 

My health, stroke recovery regime, precludes sitting without regular exercise, plus grandparent duties for our grandchildren (parents all working).  Hence time at a premium.

Please be patient but still visit Lost Legacy when you can.

Gavin