Thursday, June 16, 2016

ADAM SIMTH DID NOT 'FOUND' MODERN CAPITALISM

Gillian Tett, US Managing Editor, Financial Times posts (15 June) on Huffington Post HERE 
Ask a financier today in the City of London or Wall Street to name the founding father of modern capitalism, and they will probably invoke the words “Adam Smith.” After all, three long centuries ago, Smith laid out a vision of the political economy where the ‘invisible hand’ of supply and demand drove economic growth - and where free enterprise was the driving force for vibrant capitalism.
But these days, a certain irony hangs over Smith. In the places where free market capitalism is most frequently venerated - namely Wall Street and the City - many of the core ideas behind Smith’s vision are frequently ignored. And unless these are restored, it will be hard for bankers (or anyone else) to create an effective capitalist system, let alone one that is ‘inclusive’.
So what are the elements from Smith’s 18th century writings that need to be relearnt? 
Essentially there are four. Firstly, markets work best when as wide as possible a group of people are involved. … Secondly, markets work best when prices are transparent to a wide circle of buyers and sellers, be that 18th century butchers or 21st century bankers. … Thirdly, managers must have a personal stake in private enterprise - and a true responsibility if something goes wrong. … Fourth, Smith did not consider the economy or market to be a self-contained phenomenon, separate from other areas of human existence; on the contrary, he assumed that humans lived interconnected lives, where money was embedded in morality and social relations. … often ignored in the modern financial world, where bankers devise mathematical models of the markets that appear detached from real humans - and operate in an intellectual and social ghetto that is often disconnected from wider society.’
Comment
Adam Smith was not the ‘the founding father of modern capitalism’. It is not sensible to create such a veneration for Adam Smith’s role because it is misleading and betrays a lack of knowledge of his Works, which were about the historical background to his descriptions of commercial economies that had been underway for centuries in Europe - even the word ‘capitalism’ was first used in English in Thackeray’s novel, The Newcomes in 1854 - Smith died in 1790.
Gillian Tett states that ‘many of the core ideas behind Smith’s vision are frequently ignored’. True! But the reason modern economists - and journalists - have ignored Adam Smith’s core ideas is qute basic. Very few of them have actually read Smith’s books - ‘Theory of Moral Sentiments’, 1759 and ‘’Wealth Of Nations, 1776, let alone two surviving manuscrpts of his students’ notes (Lectures on Rhetoric and Belles Lettres, and his Lectures on Jurisprudence), nor his posthumous, History of Astronomy
This places them at the mercy of others, whose acquaintance with Adam Smith’s ideas came from others who didn’t read Smith either and taught accordingly, or learned to repeat misleading accounts of what he allegedly said.
Gillian Tett demonstrates the consequence of her weak acquaintance with Adam Smith by writing: ‘Smith laid out a vision of the political economy where the ‘invisible hand’ of supply and demand drove economic growth - and where free enterprise was the driving force for vibrant capitalism.’
Adam Smith said no such thing. His use of the metaphor of ‘an invisible hand’ (all senior journalists at least know from their knowledge of the English language, what a metaphor is and what it contributes to literacy) did not refer to ‘supply and demand’ nor was he aware of that the 'invisible hand was the ‘driving force for vibrant capitalism’ (see above)
Should Gillian Tett wish to trace the origns of the current misunderstandings of Smith’s use of the metaphor of ‘an invisible hand’, she can read Paul Samueson’s famous textbook ‘Economics: an analytical introduction’, 1948, McGraw Hill (c.5 million sales in 19 editions and a vibrant second-hand market).
Markets work, and always have since the 8th century BC by VISIBLE prices and cannot work without them. Smith understood that. There is no role for an ‘invisible hand’, miraculously guiding sellers and buyers to equilibrium. 

The use of the metaphor of ‘an invisible hand’ refers to the motivated actions of merchants for the intended consequences of their actions, which actions could have unintended consequences that unbeknown to the merchant could be public benefits too. The motivated actions of merchants could instead have public disbenefits, such as in motivated actions to have tariffs imposed - even outright prohibitions - which are, explained Smith many time throughout Wealth of Nations, public disbenefits.

3 Comments:

Blogger John said...

Dear Professor Kennedy,

You mention Economics: an analytical introduction, but I can't find that anywhere.

Is that the same as Economics: An Introductory Analysis, The Original 1948 Edition: https://www.amazon.co.uk/Economics-Introductory-Analysis-Paul-Samuelson/dp/0070747415/ref=sr_1_4?s=books&ie=UTF8&qid=1466217479&sr=1-4&keywords=paul+samuelson

2:42 am  
Blogger Gavin Kennedy said...

John
Thank you or your corrective comment.
You are of course right. I have a copy of Samuelson's first edition in my library - and quite a few other editions that I used for my paper published in History of Economic Ideas in 2010, following Samuelson's death: "Paul Samuelson and the Invention of the Modern Economics of the Invisible hand":
"Samuelson, P. A. Economics: and introductory analysis, New York: McGraw-Hill Company, Inc. editions 1-19: 1: 1948; 2: 1951; 3: 1955; 4: 1958; 5: 1961; 6: 1964; 7: 1967; 8: 1970; 9: 1973; 10: 1976; 11: 1980; 12: 1985; 13: 1989; 14: 1992; 15: 1995; 16: 1998; 17: 2001: 18: 2005; 19: 2010."
Should you wish a copy of the article, let me know.
Gavin

3:45 pm  
Blogger Gavin Kennedy said...

John
Thank you or your corrective comment.
You are of course right. I have a copy of Samuelson's first edition in my library - and quite a few other editions that I used for my paper published in History of Economic Ideas in 2010, following Samuelson's death: "Paul Samuelson and the Invention of the Modern Economics of the Invisible hand":
"Samuelson, P. A. Economics: and introductory analysis, New York: McGraw-Hill Company, Inc. editions 1-19: 1: 1948; 2: 1951; 3: 1955; 4: 1958; 5: 1961; 6: 1964; 7: 1967; 8: 1970; 9: 1973; 10: 1976; 11: 1980; 12: 1985; 13: 1989; 14: 1992; 15: 1995; 16: 1998; 17: 2001: 18: 2005; 19: 2010."
Should you wish a copy of the article, let me know.
Gavin

3:46 pm  

Post a comment

<< Home