Adam Smith's Lost Legacy: August 2016

AN ECONOMIST LOOKS BACK AT EARLY MARKETS

James P. Pinkerton posts (30 August) on Breitbart News HERE

“On the Origins of the Orthodoxy: Adam Smith and David Ricardo”

“The beginnings of an intellectually rigorous discussion of trade can be traced to 1776, when Adam Smith published his famous work, An Inquiry into the Nature and Causes of the Wealth of Nations.

One passage in that volume considers how individuals might optimize their own production and consumption:

It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.

Smith is right, of course; everyone should always be calculating, however informally, whether or not it’s cheaper to make it at home or buy it from someone else.

We can quickly see: If each family must make its own clothes and grow its own food, it’s likely to be worse off than if it can buy its necessities from a large-scale producer. Why? Because, to be blunt about it, most of us don’t really know how to make clothes and grow food, and it’s expensive and difficult—if not downright impossible—to learn how. So we can conclude that self-sufficiency, however rustic and charming, is almost always a recipe for poverty.

Smith had a better idea: specialization. That is, people would specialize in one line of work, gain skills, earn more money, and then use that money in the marketplace, buying what they needed from other kinds of specialists.

Moreover, the even better news, in Smith’s mind, was that this kind of specialization came naturally to people—that is, if they were free to scheme out their own advancement. As Smith argued, the ideal system would allow “every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.”

That is, men (and women) would do that which they did best, and then they would all come together in the free marketplace—each person being inspired to do better, thanks to, as Smith so memorably put it, the “invisible hand.” Thus Smith articulated a key insight that undergirds the whole of modern economics—and, of course, modern-day prosperity.”

COMMENT

Most of what James P. Pinkerton alludes to is unexceptional and fairly accurate historically. For most human societies for thousands of years, the making or adapting of nature’s provisions for instance was based on self-sufficiency and the necessity of the resultant relative poverty. The absence of specialisation, apart from the sex/gender division of labour, was the most common characteristic of our species. This did not preclude variations in the quality of what individuals produced. Some were better at tracking animals - and strangers from other tribes or clans - as well as all the other daily tasks of self-sufficiency.

The resultant differences in quality were just the way it was over the millennia. These individual diferrences probably were a basis, eventually, for the emergence of rude forms of exchange in the inevitable trade-offs by non-monetary exchanges of roles between individuals. Trackers, stalkers/chasers/killers/carriers/skinners/
butchers and cookers which were likely the basis for elementary and natural specialisation, again over millennia.

However, what basis there was for using the metaphor of ‘an invisible hand’ is an open question. Market places were a long way in the future.

James P. Pinkerton jumps ahead too fast. ‘Free marketplaces’ do not spring to mind as an early practice of human kind, nor does the "invisible hand" metaphor have any relevance.

ADAM SMITH's REALISTIC ASSESSMENT OF BALLIOL COLEGE, OXFORD

Timothy Taylor posts (29 August) on his Blog, Conversible Economist HERE

Adam Smith on Teaching and Incentives

“Let's start with some characteristically realistic (or even cynical?) comments from Adam Smith in the Wealth of Nations, from his discussion "Of the Expense of Institutions for the Education of Youth" (Book V, Ch. 1, Part III, Art. II).

Smith argues that when teachers don't have incentives to work on their teaching, then teachers will either "neglect it altogether, or ... perform it in as careless and slovenly a manner as that authority will permit." Moveover, if all the teachers come together in a college or university, they will support each other in their disdain for teaching: "In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching." Smith further argues that all the discipline at colleges and universities is aimed at students, not teachers, and includes this comment: "Where the masters, however, really perform their duty, there are no examples, I believe, that the greater part of the students ever neglect theirs. No discipline is ever requisite to force attendance upon lectures which are really worth the attending, as is well known wherever any such lectures are given."

Here are the extended passages from which these snippets are drawn:

"In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every many to live as much as his ease as he can; and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.

"If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself persons who either are, or ought to be teachers; they are likely to make a common cause, to be all very indulgent to one another, and every may to consent that his neighbour may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching. ...

"The discipline of colleges and universities is in general contrived, not for the benefit of the students, but for the interest, or more properly speaking, for the ease of the masters. Its object is, in all cases, to maintain the authority of the master, and whether he neglects or performs his duty, to oblige the students in all cases to behave to him as if he performed it with the greatest diligence and ability. It seems to presume perfect wisdom and virtue in the one order, and the greatest weakness and folly in the other. Where the masters, however, really perform their duty, there are no examples, I believe, that the greater part of the students ever neglect theirs. No discipline is ever requisite to force attendance upon lectures which are really worth the attending, as is well known wherever any such lectures are given.”

Comment

Timothy’s excellent above quotes are from Smith’s Wealth of Nations and are an interesting view of a most painful period (1740-6) in Smith’s life as a student at Balliol College, Oxford (WN V.i.f.Article 2:. 4-8, 14-18 pp 758-64). His treatment by the Balliol academic authorities was quite disgusting. After he became a renowned authority, Oxford scrambled to include Smith’s name as a graduate of Oxford, a gesture they slovenly ommtted while he was on campus.

Smith left Balliol in disgust with the lack of even a tolerable quality in the academic offerings by the so-called professors. His standard of comparison in scholastic diligence was Professor Hutcheson’s moral philosopy class at Glasgow University, where he was a student from 1737-40. Admittedly Hutcheson set a high bar in quality, which Balliol’s slovernly professorial corruption was in sharp contrast.

I discuss this issue, among others, in my new book I am writing.

LOONY TUNES no. 168

1

Swaroop Swaminathan posts (29 August) in New Indian Express HERE

“No playschool out there in states, despite RTE instructions

In schools where there is a proper system of coaching, other invisible hands act to threaten to alter the ecosystem.“

2

Jill Richardson posts (27 July) on OtherWords HERE

“There’s No Such Thing as a ‘Free Market”

Capitalism with absolutely no government intervention is a myth — and always was.

The debates leading up to the election this year will no doubt invoke the “American value” of capitalism. But what, exactly, does that mean? And what should it mean?

I’m no economist, but I took a few economics courses while earning an undergraduate business degree. Growing up in a capitalist society, I thought I understood the basic concepts underlying capitalism — free markets, competitive advantage, and so forth.

Then I actually read The Wealth of Nations by Adam Smith, the founding work that described what we call capitalism in the first place. That was a game changer.

We’re all probably familiar with Smith’s ideas at some level.

The market regulates itself, as each of us operates based on our own self-interest. Businesses try to earn profits, and consumers try to meet their needs at the best prices. The market ensures that the demand of consumers is met with supply from business.

The government’s job, the doctrinaire thinking goes, is to get the heck out of the way. It doesn’t set prices or quotas. It just lets the market function.

Adam Smith cast this arrangement in glowing terms in 1776. He was describing England during the Industrial Revolution. He thought it was amazing that millions of individual actors, each operating based on self-interest, could so efficiently revolutionize society without any central planning at all.

Only, he was wrong.”

COMMENT

Jill Richardson is wrong about Adam Smith’s ideas. I see no evidence that she has read Adam Smith’s Wealth of Nations despite har claims to have done so.

Adam Smith knew nothing of what we call ‘capitalism’ - the word itself was first used in 1854 in Thackeray’s ‘The Newcomes’. Moreover, the economic system prevalent in Smith’s times (1723-90) was quite different from what emerged after Smith had died, which was before the ‘Industrial Revolution’ - another term first used long after Smith’s life. Both ‘capitalism’ and the ‘industrial revolution’ occurred in the 19th, not the 18th century.

3

Editorial (29 September) in the Dallas Morning News HERE

How Dallas has become a middle-management capital

Between financial and professional services, Dallas has become a middle-management capital.

How to keep the momentum going? We trust in the invisible hand of a free market, but it’s also crucial to keep investing in people. A competitive workforce is our greatest competitive edge.

4

Elizabeth Rayne posts (29 August) in blaster HERE

“The Ten Spookiest Unsolved Mysteries in Space”

“Already haunted by bizarre ghosts and undead stars, it harbors unseen forces that tear at the universe like invisible claws and has covered up astral cannibalism and lunar murder. Investigating scientists have not always been able to make sense of why things appear out of nowhere, disappear into nowhere, happen against astronomical odds, or even exist.”

5

Peta Tait, a professor of Theatre and Drama, La Trobe University, Australia, posts (29 August, 2016) HERE

“Sequins and symphonies: how opera ran away with the circus”

“Invisible hands seemed to tear at a solo female performer in extreme thrashing, stabbing and writhing until she left, precariously walking on bent toes.”

6

Shaun Nicols posts (29 August) in The Register HERE

“FAA powers up an invisible hand, groping the skies for rule-busting biz drones”

7

Abhishek Sharma posts (29 August) in Himalayan Times HERE

“Guided development model: More of a hindrance?”

“The state merely functions as a neutral arbitrator between citizens and private actors who are engaged in economic activity as independent agents with the sole goal of maximizing profit.

The state only intervenes through the judicial channels once there are disputes between private parties related to allocation of economic resources or with respect to the enforcement of contracts.

Economic activity, it was believed, was best left to the discretion of the private sector with only minimal state involvement.

The “invisible hand of the market” would then ensure that the fruits of increased productivity and wealth creation would accrue to all sections of society.”

Comment

Follow the link and read a most interesting dismissal of the experience of applying “invisible hand” economics in Nepal.

ROLL OF HONOUR no. 3

1

Anna Silim posts (August) in Evonomics HERE

“What is New Economic Thinking?

Three strands of heterodox economics that are leading the way”

“Neoclassical economic theories describe a world in which rational agents act as optimal decision-makers. Guided by possession of a full set of information, self-interested agents maximise utility while firms maximise profits. As a result, the economy is said to behave in a static and linear manner and the system tends towards a state of equilibrium: supply equals demand and an optimal price is set. Macroeconomic patterns are simply the sum of microeconomic properties (Blanchard 2010).

In this model, economies are not necessarily always in equilibrium; exogenous shocks, such as the development of a new technology, can disrupt them. But these disruptions will be temporary and market mechanisms will work to push the economy back to equilibrium. From a neoclassical perspective, economic development occurs through cyclical patterns of equilibrium, shocks, destabilisation and restabilisation. In each cycle the content of the economy such as the goods and services it offers might change, but its very nature essentially remains the same.

This conventional model can be challenged on four fundamental fronts: the tendency to equilibrium, exogenous shocks, individual rationality and systemic consistency. In the real world, economies are not static and geared towards equilibrium; they are dynamic and in constant flux. This dynamism is endogenous; it originates within the system, not from exogenous shocks. Consumer preferences are not formed by individuals acting solely on their own but are the result of a complex process that includes observing and interacting with other consumers. Economic agents do not have a fixed set of preferences based on rational assessment; they are subject to whims and to mimicking the behaviour of other agents. As a result, the nature of the economic system transforms over time.

In reality, the economy is a complex ecology rather than a complicated machine. It does not respond in predictable ways. It is path-dependent, with each phase building on the previous one.”

COMMENT

This and similar articles in EVONOMICS (the next evolution of economics) are rich contributions to the debate. Worth subscribing to by all modern economists).

2

George H. Blackford, former Chair of the Department of Economics at the University of Michigan-Flint. He received his Ph.D. in economics from the State University of New York at Buffalo. He posts on EVONOMICS:

“Economists Should Stop Defending Milton Friedman’s Pseudo-science

“On the pseudo-scientific nature of Friedman’s “as if” methodology.”

COMMENT

When I was an undergraduate economics student in the 1960s, Milton Friedman was head of the reading list and no discussion took place on the validity of Friedman’s claims and assertions. Hence, we didn’t quibble. Years later we had our doubts.

I therefore advise readers of LOST LEGACY to visit EVONOMICS and read Blackford’s interesting demolition of Friedman’s assertions and pass the link on. HERE

POTS CALLING KETTLES BLACK?

Stan Burman: “an entrepreneur and freelance paralegal who has worked in California and Federal litigation since 1995 and has created over 300 sample legal documents for California and Federal litigation, posts (8 August) on Useful Qutations HERE

“Quote by Adam Smith on the invisible hand”

“A quote by Adam Smith on the invisible hand is the topic of this blog post”.

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society. 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 not part of his intention.” Adam Smith”

COMMENT

The above quotation from paralegal who has “worked in California and Federal litigation since 1995” and who is “the author of over 300 sample legal documents for California and Federal litigation” is an embarrassing example of the work of a supposedly proficient and accurate legal professional. I would have severe reservations about employing Stan in such a role, especially if my freedom or my client’s freedom depended on the probity of his legal work.

Stan’s version of Adam Smith’s statement on the “invisible hand” metaphor and the context in which Adam Smith used it is erroneous. Here is what Adam Smith actually wrote in Wealth of Nations:

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (WN IV.ii.10: p. 456).

Smith was making a specific statement relating to the context he was writiing about. The context was that of a merchant who intentionally avoided foreign trade because of his reservations about the probity of the foreign merchants he would have to deal with. He therefore avoided foreign trade and invested locally. In so doing he unintentionally added to domestic capital and employment.

It is not correct to generalise to all merchants from a necessary consequence of the risk-averse merchant’s actions by “persuing his own interest.” The risk averse merchant benefits society but there are many cases of merchants “pursuing their own interests” who intentionally seek to benefit themselves at the expense of others in society. This can be seen in the clamour by many merchants to impose tariffs on imported goods, even outright prohibitions on foreign imports, which necessarily reduces foreign competition and raises domestic prices against the interests of domestic consumers. Such behaviour is definitely not a domestic public benefit.

Stan, however, comments thus, and criticises Adam Smith as if Adam Smith, not Stan, made the mistake that was wholly down to Stan’s incorrect version of that which Adam Smith correclty stated. Stan asserts:

“This is an excellent quote by Adam Smith and one that I totally agree with as people who are acting in their own self-interest do tend to provide an overall benefit to society. I do agree that the invisible hand can work wonders but I also realize that there are many individuals and in particular, large corporation that act only in their own self-interest without any regard for the rest of society such as the big banks and other politically connected companies. I despise the people who mindlessly spout the quotes of Adam Smith to suit their own agenda. Now that I have read more quotes by Adam Smith I see clearly now that while he clearly believed in free enterprise he was not as much of an advocate for limited government as many “free market” ideologues make him out to be.”

Instead of reading quotes from Adam Smith, Stan should read Wealth of Nations itself. He even makes the following statement;

“I despise the people who mindlessly spout the quotes of Adam Smith to suit their own agenda” [!]. A case of the pot calling the kettle black?

Visit his website at http://legaldocspro.net and his legal blog at http://legaldocspro.net/blog

THE ALLURE OF ANALOGIES FROM PHYSICS

Philip Ball, the author of: ”Invisible: The Dangerous Allure of the Unseen” and many books on science and art, posts HERE

“It might seem unlikely, even insulting, to suggest that people can be regarded as little magnets or particles dancing to unseen forces. But the danger is not so much that “social physics” is dehumanizing. Rather, it comes if we do not use the right physics in thinking about society.

Physicists have learned that natural systems can’t always be described by classical, equilibrium models in which everything reaches a steady, stable state. Similarly, social modelers must beware of turning society into a deterministic Newtonian machine by applying inappropriate physical models that assume society has only one way of working properly. Society rarely finds equilibrium states, after all. Social physics needs to reflect that very human trait: The capacity to surprise.

Both the attraction and the pitfalls of a physics of society are illustrated in economics. Adam Smith never actually used the term “market forces,” but the analogy was clearly in his mind. Noting how market prices seem to be drawn to some “natural” value, he compared this to the effect of gravity that Isaac Newton had explained as an invisible force a century earlier. Smith also said in his seminal Wealth of Nations that an “invisible hand” maintains equilibrium in the economy.

Smith was not alone in following Newton. Newtonian clockwork mechanics were, at the time, regarded as the model to which all understanding of nature should aspire, perhaps even including the mechanics of the human body and of society.

Comment

Looking through my desktop I have found several draft posts that I do not remember posting as my replies. As the above is very relevant to my thinking and published writing, I shall publish my comments here.

The assertion that “Noting how market prices seem to be drawn to some “natural” value, he compared this to the effect of gravity that Isaac Newton had explained as an invisible force a century earlier”, is not quite what Adam Smith said, and the difference is important.

In a paper I wrote on this very subject in 2015, I argued:

“All bodies with mass exert gravitational pull on all others, but not all of them have the same mass or exert the same degree of mutual attraction that draws them physically towards each other or holds them in regular orbits. It does not follow that Smith’s use of gravity as a metaphor described an observed or plausible relationship between Market and Natural prices, either of which were sometimes above or sometimes below the other’s prices, as described in WN.

Smith’s metaphoric use of gravity was not intended as a scientific statement about the physics of a gravitational attraction embodied in prices. He ex- presses his reservations twice, first writing: “the natural price, therefore, is as it were, the central price, to which the prices of all commodities are continual- ly gravitating (WN I.vii.15: p.75) and then repeats it two pages later: “the mar- ket price of every particular commodity is in this manner continually gravitat- ing, if one may say so, towards the natural price” (WN I.vii.20: 77). Ultimate- ly, production costs (as defined) must tend to be met by market prices, inclu- sive of the participants’ profits, if economic production is to commence and continue. Natural and Market prices do not exhibit the definable physics of ‘mass’, nor do yhet operate in a definable or predictable order. If Smith’s metaphoric references were scientific statements, Newtonian or Epidoclean, Smith would have left out his semi-apologetic qualifiers because they would have been inappropriate, bearing in mind also that not all of his readers were expected to have studied classical or philosophical history.

Smith generalises, in the round quite heavily, his metaphoric assertions about Natural and Market prices. Indeed, in the immediately following chapters he goes into detail about metaphorical gravity relationships: “yet sometimes par- ticular accidents, sometimes natural causes, and sometimes particular regu- lations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price.”

Extract from: Kennedy, G. Adam Smith’s Use of the ‘Gravitation’ Metaphor, published in Economic Thought 4.1: x-xx, 2015.

IT SOON SHOWS IF YOU PRETEND TO HAVE READ ADAM SMITH AND THEN PONTIFICATE WRONGLY ABOUT HIS IDEAS