ADAM SMITH'S ERRORS ON 'JOINT STOCK COMPANIES
Andreas Martin Fleckner has written a thoroughly good piece of research into what he regards as a major error or oversight in Adam Smith’s Wealth of Nations in respect of Smith’s hostile views on the early joint stock forms of commercial oganisation:
“Adam Smith on the Joint Stock Company” published by the
Max Planck Institute for Tax Law and Public Finance Working Paper 2016 – 01.
I recommend the paper by Andreas Martin Fleckner to all readers of Lost Legacy as a model of the appropriate level of scholarly thorougness not always attained nowadays in most papers on Adam Smith. The author has certainly read Wealth of Nations and uses his knowledge to good effect.
Here is the Abstract:
“In 1784, Adam Smith released the third and definitive edition of the Wealth of Nations, the most influential work in economics ever written. Of the eighty pages he added, more than thirty deal with “joint stock companies” and other commercial organizations. While these additions caused many observers to praise Smith as the first to coin the governance problems in firms, a closer examination of his remarks reveals that Smith’s theory of the firm, or the lack thereof, is in fact one of his work’s weaker parts. Smith thought history had shown that joint stock companies cannot compete with smaller firms, attributed this fact to certain organizational deficits, and concluded that joint stock companies should be established only under rare circum- stances. Yet, in the following decades, exactly the opposite came to pass, with joint stock companies thriving in almost all fields and markets today. What made Smith so pessimistic about the joint stock company? The answer lies, this paper argues, in the sources Smith consulted, the companies he studied, and the general beliefs he held. Why did Smith’s pessimism turn out to be wrong? Smith probably overestimated the joint stock company’s weaknesses and underestimated developments that helped overcome them, such as technological progress, organizational innovations, and regulatory responses.”
Copies can be obtaned from:
Max Planck Institute for Tax Law and Public Finance Working Paper 2016 – 01, January 2016.
Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law, Department of Public Economics http://www.tax.mpg.de
Comment
While the paper is excellent and well worth reading, I have some criticisms, mainly regarding relevant biographical circumstances which Andreas Martin Fleckner does not discuss that were strikingly relevant to Smith’s scholarly work after 1778 up to his death in 1790.
I shall compose a short note on these influences shortly.
2 Comments:
I found the Fleckner paper most interesting and look forward to seeing your comments. The question that it raised for me is, Why didn't Smith - and the classical economists who followed him - develop a theory of the firm?
Perhaps the most obvious reason for this is could be that Smith just wasn't interested in the firm as such. He was, as the title of this book would suggest, interested in economic growth and its nature and causes. This didn't require a theory of the firm in terms of a theory explaining the existence, boundaries and internal organisation of the firm.
But Smith had the foundations of a theory in that he famously discussed the division of labour in the opening chapter of the Wealth of Nations and made thoughtful comments on ‘joint-shock companies’ in the 3rd edition on. When considering the internal organisation of such firms Smith raises, but does not develop a theory of, what we would call today, the principal-agent problems that arise from the separation of ownership from control.
There may also be an empirical reason for the firm being overlooked; the relative unimportance of the firm. Until relatively recently firms were simply not a large part of the economy. But it has been pointed out that such an explanation is not wholly convincing. Large firms have existed since before the time of Adam Smith and the classical economists knew this. A more precise, and more defensible, version of the argument would be that the large, vertically integrated and diversified firm was not empirically important until recently.
For whatever reasons the line of thinking was followed by Smith and the classical economists resulted in a situation which Mark Blaug could summarise simply by noting that the classical economists “[ ...] had no theory of the firm”.
It just seems a bit strange to me.
Paul,
Thank you for your perceptive (as ever) note on the absence of a theory of the firm in Adam Smith's published Works. I am preparing my response to Fleckner's paper for publication on Lost Legacy - actually a summary of my notes for a chapter in my new book,' The Authentic Adam Smith' (presently being considered by a publisher).
The gist of my criticism of Fleckner's otherwise excellent essay is the absence of any consideration of Smith's actual circumstances from 1778-90.
He was no longer a full-time professor and had not been such since 1764. Professors were not appointed for life at the time and when they resigned they eased to be such. (My title as Professor Emeritus is for life and 'good behaviour'). Smith had been busy as an off-campus tutor to the young Duke of Buccleugh (1764-66), and later private scholar writing Wealth of Nations (1767-76), and Commissioner of Customs (1778-90).
Apart from later editions of WN and TMS, he was rather busy elsewhere, particularly a a Commission of Customs (4-days a week, except some absences while preparing new editions of his two books when badgered by his loyal publishers).
His initial thoughts on joint stock companies were not developed and, anyway were not subject to empirical counter evidence to hand.
Modern researchers have access to a) modern studies of the evidence and the modern 'Theory of the Firm', b) recent (post 1800) scholarly discourses not available to Adam Smith, and c) Smith was not inclined to address such relatively faint empirical evidence as might have been available for someone motivated to search for it in an otherwise busy schedule of work as a diligent and busy Commissioner - Smith signed 90 per cent of the Custom's correspondence and socialised Friday to Sunday at his famous suppers at Panmure House and at his drinking club at the nearby Oyster Bar.
In short, Smith was in retirement.
I shall publish a piece to the above effect on Lost Legacy (and shall send a copy to you. It is envisioned as a chapter in The Authentic Adam Smith.
Gavin
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