Wealth Of Nations: 236 years old, today

From Eamonn Butler, Director, The Adam Smith Institute (London)Pin Factory Blog HERE

"Today is the 236th anniversary of the publication of the Wealth of Nations. Here is Eamonn's post commemorating last year's anniversary:

For a quarter of the last millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for most of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market.

The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live. Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. And yet it is the book which took economics out of its primitive phase and made it distinctly modern. We can understand what Smith says because it is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. He had invented the idea of gross national product. And the wealth of the citizens of that country depends on how many there are. He had invented the idea of GDP per capita. And so it goes on.

But surely his greatest breakthrough was the realisation that we do not have to grow or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world."

Comment
A typical brilliant concise contribution from Eamonn Butler, Director of the Adam Smith Institute, London, combining his erudition and clarity on the lasting legacy of Adam Smith and, at the same time, reaching into new aspects of Smith's thinking that are usually neglected during the 236 years of access to his ideas.

I refer to his last paragraph. I have been making much the same point (without Eammon's clarity) for years, to little avail. It was not gold and silver, nor millions of paper in the bank, that constituted the real wealth of a nation; it was, in Smith's words, the annual output of the "necessaries, conveniences, and amusements of life". But more, this idea was rooted in a characteristic of humankind, namely the "propensity to exchange"; a characteristic that "probably" was traced back to the emergence of the "faculties of reasoning and speech" (Wealth Of Nations, Chapter 1, 1776).

This idea of Smith's, normally ignored by readers, but not by Eammon Butler, in my view, is Smith's most significant idea, or rather, the hint of it. That it is wrapped with the 18th-century wordage of the "propensity to truck, barter, and exchange" has probably condemned it to its relative anonymity among scholars. But Eamonn is absolutely clear. For Smith, read "exchange"!

Currently, I am working on an essay: "Adam Smith on Exchange: the first 200,000 years", in which I address, in the manner of Adam Smith's central method of enquiry throughout his works, "conjectural history" (See Dugald Stewart's, 1793 Eulogy to Adam Smith, 1795) the significance of exchange for Smith’s philosopy. This revises my 2003 unpublished "Prehistory of Bargaining", with surveys of recent work on anthropology, palaeontology, and history, plus a closer look at aspects Smith’s philosophy in his Works.

So, enjoy Eammon’s celebration of the 236 years of Wealth Of Nations.

Also, follow the link HERE to the Adam Smith Blog, for both contemporary views on today’s issues, and occasional contributions by Eamonn Butler.

[Disclosure: I am a Fellow of the Adam Smith Institute]

If You Must Quote Adam Smith, First Understand Him

The author of a Blog, Decline of the Logos HERE has commenced a series of critiques of the Adam Smith Institute. His\Her “No 1” quote is unpromising as to whether he/she understands Adam Smith’s Wealth Of Nations, while quoting from it to find quote “with “which annoy the Adam Smith Institute”. What an ambition!

Logos’s “no 1” quote is from Wealth Of Nations (WN 1.viii.11-12: 83-84):

“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.
“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”

To Which Logus observes:

“Smith is here observing that the freedom of contract between capitalist and worker is, in reality, no such thing. The relative levels of capital each holds distort the negotiation: the capitalist can always afford to hold out for longer. However, within procedural justice libertarianism, freedom of contract is interpreted as absolute: any Government intervention, whether it be through regulation of rights or wages, is an immoral intrusion into a private negotiation.

The above quote appears to indicate that Smith understands that the freedom to make contracts varies between capitalist and worker, in a manner dependent on their relative wealth. This particular freedom appears to be determined less by Government intervention and much more so by possession of capital. Being a strong believer in the power of freedom, I would advocate that some way be found to bring a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself. I am agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union.’

Comment
The first thing to note here is that Adam Smith, writing in 1763-76, was observing the prevailing system of wage bargaining in the mid-18th century. It was not just a matter of relative “wealth’ that determined the outcome; the powers of local magistrates given them by Acts of Parliament, and the Combination Acts, contributed a great deal too. A lot has changed since then to the current situation in the 21st century. Not only has the law changed to allow wage bargaining (and much else), but also we have accumulated much experience of how trade unions operate in practice, some for the good of their members and some not so good. In so far as the, now defunct, ‘closed shop’ experiences are concerned, it was not freedom to bargain that was sanctioned, so much as restrictive trade union monopolies and, sadly, on occasion localized tyranny against individual employees. Also, the state continued to intervene, sometimes for the good and sometimes less so.

In the 18th century, Adam Smith observed what actually went on across the land. Local magistrates (a social set intimately identical with “merchants and manufacturers” and landowners) set low wage rates for many labourers. Adam Smith tended to despise their partiality. The State also prohibited freedom of assembly and strike-related “outrages”, with flogging though the streets, jail terms and transportation for transgressors (K. J. Logue, 'Popular Disturbances in Scotland, 1780-1815'). These and other examples of judicial outrages were known and commented upon by Smith within the strict and judicious self-censorship of the times. By the post-war decades of the 20th century, these had passed away, replaced by anti-liberty legislation enforcing the extra-judicial powers of trade union leaders (a phenomenon noted in Michel’s ‘Iron Law Of Oligarchy’, earlier in the century) and by the semi-corporate state established by Labourism in the 1960s.

Logos wants “a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself.” He/she is “agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union”. It is not clear exactly which age-group Logos is in, but any knowledge of post-war industrial relations shows that solving the dilemma of “freedom of contract” for firms and employees is a problem for which there have been many efforts, few of them successful.

How close Logos is to running a large (or small) organization is also an experience that might also inform him/her of the daily realities of 21st-century management, for which many reforms have been proposed (and tried), and all have failed. Cop-outs are not one of the workable solutions in the real world.

Logos concludes: “However, the Adam Smith Institute has recently put forward a proposal that runs counter to this aim of securing greater freedom of negotiation, which they have dubbed the ‘Self Employment Option’. This calls for greater use of the self-employed status amongst workers, which “sidesteps the burdens not only of PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“. The self-employed, being freed from the ‘burden’ of rights, will have less freedom in negotiation than the employed. It is difficult to interpret this in any other way than the ASI having a very different understanding of freedom of contract to Adam Smith.”

Comment
Where a total, all-embracing solution is not viable, we are left with partial tinkering. Where experience shows that what we have is not working, which is certainly the case for many firms and institutions that experience the problems created by, no doubt well-meaning measures, like “PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“, it is very Smithian to offer suggestions, if only to experiment at the margin to see what works or doesn’t, and move on from there. Just because we cannot change everything, that is no reason to oppose changing something. Blanket faith in all-or-nothing quick changes, with dire predictions of what could, might, or will happen as a consequence, is, with respect, very unSmithian.

ASI, as I understand it, is about pragmatism – including imaginative suggestions, which are what ASI does best – and I suggest, modestly, that Logos has some ways to go before its advice is credible, either in the selection of quotations from Adam Smith or in understanding the problems of 21st-century Britain.

[Disclosure: I am a Fellow of the Adam Smith Institute, writing on this occasion in a personal capacity.]

Optimism About Free Markets

Let me introduce you to the best 640 words on optimism and free markets that I have read for a long time. They were written by Eamonn Butler, Director of the British think tank, The Adam Smith Institute, London. He is also the author of Adam Smith: a primer (IEA) and more recently, Austrian Economics: a primer (2010).

They are a nice complement to another piece of rest and restoration reading that I have enjoyed these few weeks in France (two more to go). I refer to Matt Ridley’s, ‘The Rational Optimist: how prosperity evolves’, from Fourth Estate (Harper Collins, London), of which I may write something soon.

Eamonn Butler’s ‘Optimistic about free markets’ is fine presentation of liberating ideas that throw light on the current crisis and what can be done, utilizing markets and judicious tax reforms, rather than fiddling about at the behest of pressure groups, worthy and otherwise (mostly the latter):

Read and enjoy:

‘Though my colleagues at the Adam Smith Institute regard me as the 'down' man, always seeing the difficulties presented by any new idea, underneath I'm really an optimist. I really believe that the free market will triumph, despite everything that our system of government conspires to do to shackle it. The free market is an entirely natural system, like evolution itself, which grows and adapts whatever adversity it faces. You can concrete over a path but still, before long, the grass pokes through. So do markets.

And I'm optimistic that Britain will sort out its tax and benefits system, and adopt a flat tax on incomes and a negative income tax to relieve poverty. Looking at the first tentative proposals of the coalition government in general and of the welfare and pensions secretary Iain Duncan Smith in particular, I think we can see the first green blades of common sense breaking through here too.

Our tax system is fiendishly complicated. Civil servants like it that way, because it creates work for them. Whenever you try to tax people, they will find ways round it. And when your own money is at stake, it is worth buying in good accounting brains to protect it. So tax becomes a cat and mouse game with the Treasury: a new tax is introduced, people find ways to avoid it (quite legally), so the Treasury has to close off the loopholes with new rules. A few years of that, and the rule book gets pretty complicated. The standard tax guide for accountants now runs to about 11,000 pages across four volumes.

We should cut right through all this nonsense and have a flat tax – as we have said many times in our publications on the flat tax. Cut out all the deductions, the loopholes and the clawbacks, and have a low, standard rate of tax that applies to everyone. Then everyone knows what they and their fellow workers are expected to pay. No escape and (sadly for accountants and Revenue civil servants), no need for a lot of complicated measures to avoid tax or to make sure people pay it.

I am optimistic that similar simplicity might come to social benefits too. We have roughly 51 different social benefits. They are designed – well, that's too strong: they have grown up under pressure from various interest groups – to make sure that everybody's unique circumstances are catered for, and that nobody falls through any cracks in the system. A laudable aim, but a madly complicated result. We should scrap it all and have perhaps just two benefits – a long- term benefit for those who simply cannot earn for themselves, and a short-term benefit for those struck by temporary unemployment. Instead of a complicated raft of benefits, we should have a negative income tax. If you have a good income, more than enough to live on at a decent level, you should pay tax. If you don't have enough to live on, you should get cash – the negative bit of the tax.

After all, when you get a job, your employer pays a rate for the job. Employers don't ask you about your exact family and personal circumstances before setting your wage. It should be the same with the benefit system. That makes it simple to administer, and it encourages people to curb their costs instead of thinking about how to maximise what they can get from the authorities. True, some people in special circumstances will face hardship. But alleviating that is something that seems the proper role for the charitable sector. True, we need then to liberate the charitable sector, with things like US-style tax deductibility to encourage more philanthropic giving, so that charities can step in where the state falls short and real help is needed. But I am optimistic that we can do that, too.’

[FOR REGULAR ACCESS TO THE ADAM SMITH INSTITUTE (LONDON) AND ITS LIVELY BLOG, CLICK ON: http://www.adamsmith.org/]

Two Excellent Adam Smith Institute Briefing Papers

For the best analysis and thoughtful proposals on the current financial crisis I recommend two briefing papers from the Adam Smith Institute (London):

The first analyses the financial crisis, its causes, the 'remedies' so far proposed, and its proposals HERE:

The second makes radical alternative suggestions for the government of Britain on how it could achieve so much more if it took remedial steps to immediately benefit average earning families and the very poorly paid by abolishing all taxes for the lower paid (earning under £12,000) and reducing taxes on average incomes by the knock on effects on tax allowances. This paper is HERE

Both ASI Briefing papers are welcome in the current mood of pessimism; the solution is actionable now by a government that claims to want to 'do the right thing'.

[Disclosure: I am a Fellow of the Adam Smith Institute)]