HYPERBOLE ABOUT ADAM SMITH'S UNDOUBTED INTELLECTUAL CONTRIBUTIONS DO NOT ADD TO OUR KNOWLEDGE

Martin Conrad posts (23 April) in Barron’s HERE 

‘EDITORIAL COMMENTARY’ plus my comments:

How The Wealth of Nations Made Us All Wealthier

Adam Smith’s great book pointed out the modern path to the enrichment of whole societies through cooperative self-interest.

“This year is the 240th anniversary of the publication of Adam Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations, the crown jewel of the Scottish Enlightenment and perhaps the single most influential book of the modern era. This work helped form our modern idea of practical progress and provided confidence that it could reliably be achieved. [GK: Hyperbole!]

Smith confronted a longstanding paradox: Despite centuries of intellectual achievement, culminating in Europe’s scientific revolution, the economic achievement of Europe was comparatively low, [GK: compared with where?] because the nature and causes of wealth were largely misunderstood.

In pre-industrial Europe, as much as half of the working-age population was chronically impoverished. These people were unemployed or underemployed. And average longevity was less than 40 years, as it had been for centuries and not much improved from classical Greece and Rome. How had Europe’s great potential economic wealth been wasted for centuries, and why?

Smith argued that man was an economic animal who, by his bargaining and exchanging in the marketplace, [GK: Exchange long preceded the “market place”] could benefit from the diverse talents and genius of all his fellow men. This led to his seminal theory that the most important source of wealth of a nation is not gold, silver, money currency, or even its land or natural resources, but “the skill, dexterity, and judgment” of its labor force.

We see this illustrated today by wealthy nations, such as Switzerland and Singapore, that possess modest amounts of land or natural resources but have grown rich by having educated, trained, productive labor forces.

Divisions of Labor and Money

Investment and extensive markets were necessary to unlock the wealth-generating power of that labor force. Agriculture provides the early model. A farmer tills, plants, tends his crop, then harvests and sells it, which is when he finally gets paid. But what does the farmer live on before he sells his crop?

Unless a farmer is financed by his own savings or someone else’s, there will be no crop, no new wealth, no work, for he must have money for him and his family to live on while he produces what he and others will consume.

This is the crucial role of investment; it makes productive work over long periods possible. Smith saw that investment was also “consumption at almost the same time by a different set of people.” The same money invested in a farmer’s production is also spent as consumption for a farmer and his family.

Smith also elaborated on the importance of the division of labor. His discussion of a pin factory, in which pin making had been divided into 18 specialized steps, each assigned to a single worker, is justly famous for showing the productive power of specialization. By this method, 10 workers produced 48,000 pins a day, an average of 4,800 per person, when previously a lone, untrained worker on his own could have made only a few a day. [GK: the pin factory was taken word for word from the French Encylcopedia which publisher lomg before Wealth of Nations; and widely circulated in France and other Eiropean countries, inclding Scotland].

By such methods, the formerly impoverished could be raised from dependence on charity to the dignity and rising productive power of their labor. Eventually, such productivity allowed the average workweek to be reduced from 70 hours or more towards about 50.

Amplifying Capital for Investment

But how could there be enough investment capital to finance employment and growth of farms and factories in traditionally poor societies with limited savings? Smith noted that free competitive markets enforced price discipline, mediating among consumption, investment, and savings. Because competition kept prices low, consumers could afford to save and consume, and producers were forced to gain their profits from higher volumes of goods and services sold, instead of from higher prices.

Producers could increase their profits by investing in more efficient methods for their businesses, thus lowering their costs and expanding their volume, and consumers’ savings from lower prices were then available to finance that rising investment. [GK: they also practised reducing competiion - tariffs and prohibitions, etc.]

As Smith was writing, this systematic growth model of economic life was combining with the discovery of cheap, efficient energy from coal and the technological innovations that grew out of Europe’s scientific revolution. [GK. This eventually happened long after Smith had died in 1790 and would have happened anyway if Smith had never lived] They produced the first Industrial Revolution, which ultimately made possible the modern world’s spreading prosperity.

As this modern economic system compounded wealth, it vastly expanded the middle class and gradually resulted in the widespread development of political democracy.

Smith’s theories and observations also began the destruction of slavery, a universal institution throughout all of history. He destroyed the self-interest that motivated slavery by showing that economies based on it could not profitably compete with those based on a free, motivated, trained labor force.[GK. Again would have happened without Smith’s WN]

Collective Self-Interest

Smith used the metaphor of the “invisible hand” to represent the efficiency of individual action in pursuit of self-interest that collectively constitutes the instinctual wisdom of the crowd and works most commonly and effectively in free, competitive markets.[GK. Smith’s purpose was more limited]

By 1900, rapidly developing economies had expanded their populations’ life spans by more than a decade, to an average of 48 years, more than 20 years greater than longevity in the rest of the world. In the 20th century, they added another 20 to 30 years to people’s lives and were wealthy enough to help transform the less-developed nations, eventually doubling or tripling average life spans there.

These principles that enabled much of the world to escape its traditional Malthusian trap still show their power. In 1950 oil-rich Venezuela was more than three times as rich per capita as South Korea. Yet by 2011 this relation was nearly reversed as capitalist South Korea’s per capita GDP was nearly three times that of Hugo Chavez’s Venezuela, despite several years of $100-a-barrel oil.

This most practical, effective utopian philosopher [GK. Nothing utopian about Adam Smith - he described what he researched in history, not what he predicted - he did not make prediction!]has been so successful because his system works well with people—not as they morally should be, nor as he wanted them to be, but for people just as they are, which was good enough. Adam Smith described the way to harness intellectual capacity and instinctual ambition for the common good. We live and thrive today in mostly his world. [GK. Much as I admire Adam Smith’s contributions these last sentences amount to gross ‘hero worship’ ]

must update li class name

COMMENT

MARTIN CONRAD is the chief investment strategist at C.I.G., a private investment group. He posts in Barron’s HERE http://www.barrons.com/articles/how-the-wealth-of-nations-made-us-all-wealthier-1461385474

Martin Conrad, chief investment strategist at CIG group] eulogises a modern assessment of Adam Smith (1723-90), quite embarrassing to the facts.  Smith was by most measures a talented and path breaking theorist - he did not walk on water. He carefully analysed the past history of humankind through various stadial events - broadly, ‘savagery’ through to Hunting, Shepherding, Farming and Commerce. He did not make predictions of the future - except one prediction in respect of the new states formed in the former colonies in North America where he predicted they would be the wealthiest in the world by the 1870s].

Smith did not describe the “economic achievement of Europe” as “comparatively low” as there was little to compare it with in 1770; the Netherlands were growing economically and so were the southern counties of England (Scotland’s northern ‘Highlands’ remained backward compared to parts of the central lowlands - Glasgow and Edinburgh.

Martin Conrad writes: “Smith argued that man was an economic animal who, by his bargaining and exchanging in the marketplace could benefit from the diverse talents and genius of all his fellow men.” Yet Smith wrote in his Lectures on Jurisprudence (1763) and partly in Wealth of Nations (1776) that “exchange” was a human trait that differentiated the species from all other animals and had done so since humans first appeared (evolved?) deep in pre-history. The “market place” did not appear until comparatively recently and was not the main source of “bargaining and exchange”. The trait was universal, which once market relations appeared they became dominant characteristics. 

Smith’s example of the Pin Factory was taken verbatim from the French Encyclopedia published in Paris long before WN in 1776. Smith did not invent the division of labour.

“Conrad: producers could increase their profits by investing in more efficient methods for their businesses, thus lowering their costs and expanding their volume, and consumers’ savings from lower prices were then available to finance that rising investment”. Smith wrote much more on the misbehaviour of “merchants and manufacturers” who engaged regularly in seeking to reduce competition through tariffs and prohibitions, licences, and political interferences, so they could raise prices and generate higher profits.

Conrad: “As Smith was writing, this systematic growth model of economic life was combining with the discovery of cheap, efficient energy from coal and the technological innovations that grew out of Europe’s scientific revolution.” Realisitically, all this would have happened even if Smith had not written WN; it  did not require Smith, or anybody else, to notice what was going on independently of authors decades before the 18th century. There was nothing utopian about Adam Smith’s ideas. He described what was going on in the economy quite independent of his research, Neither did Smith make predictions. 

Adam Smith did not describe “the way to harness intellectual capacity and instinctual ambition for the common good”. Nor do we “live and thrive today in mostly his world”. So much happened after Smith died that he would have been astonished at many events, though probably not so surprised at the continuing ability of humans to mess up what they do compared to what they could do or might have done.