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.]

What Adam Smith Actually Said

Gary Clausheide writes in The Energy Bulletin HERE

Yes, It’s yet another example of a ‘plan’ to change the world by design, based on an account of history from earliest times written to derive the author’s assertions about what’s wrong with the world, including the unsurprising assertion/assumption that ‘them’ (the men with the power, however defined) consciously did what they did and the rest of ‘us’, or at least our ancestors, put up with whatever ‘they’ inflicted and inflict upon ‘us’. In short, the history of the human species has been a conspiracy of the few against the many.

But worry not, Gary Clausheide, has investigated the past and derived the ‘solution’ in something he calls ‘community’. Hence, his post:

“The Importance of envisioning ‘community” (part 3)

I shall take two examples of his ‘history”, regarding the views of Adam Smith (read his long post at the link for much, much more):

“Adam Smith said that the purpose of government was to protect property. Apparently the property of the wealthy is much more important than the homes, farms, and jobs of ordinary people.”

Comment
Adam Smith did indeed include in his lectures on jurisprudence, of which we have two sets of students’ notes (published in 1978 by Oxford University Press and later in a cheap edition by Liberty Press in 1982 – see Amazon) a discussion on the origins of civil governments, in which he summarized their role to protect the rich from the poor.

In those first ages of the new means of subsistence as some human groups left the old mode of subsistence, derived from the forest and the open plains (scavenging, hunting and gathering) to new modes, such as shepherding and more recently, farming, Smith identified an inescapable necessity, that of protecting the product of the labours of some people (but not those who persisted in the older ways) from the inevitable depredations of people wandering into the feeding areas of the herds and the planted fields of the farmers.

Those families who laboured to catch, coral, and consume from their herds had to prevent their herds wandering away, or being taken away by other families. The first property was that which belonged to the labourer. When a group of families enacted that idea they asserted the first acts of civil government – to protect those with from those without.

Those families who cleared the land of trees, plants, stones, and debris, to plant seeds, to tend them, and to harvest them, had to prevent animals and humans wandering across their lands and eating or destroying growing plants. In less than a day, either trespass could wipe out months of hard labour, from which those dependent on future food stock could starve.

The parable of Cain and Abel in Genesis is a tale of a clash between a farmer and a shepherd that echoes down the ages.

Group-approved conduct and group disapproved breaches of such agreed conduct also bound the members of a hunter-gatherer group. The new forms of subsistence that appeared along today’s Turkey/Syria boarder area 11,000 years ago, which spread from 8,000 years ago into Europe, gradually formed more complex civil codes and the associated apparatus of civil government.

Those families that had adopted the new subsistence modes became wealthier than those that had stayed as hunter-gatherers and those who occupied the fringes of the new modes as occasional labourers, supplementing their reliance and access to both old and new modes (I take account of Diamond's critique. He missed the point that for those early herders and farmers, living at the end of the Ice-Age. it was adapt to new modes or die).

By wealth, Smith, as always, meant the “annual output of the necessaries, conveniences, and amusements of life”. It had nothing to do with today’s meanings of wealth; in those days of which Smith speaks, wealth was what was created by the labour of those who undertook the work to make the new modes viable.

Gary Clausheide appears not to have understood these points in his assertions. Of course, from these early starts, the spread of the new modes took on different forms and moved away from the original right of labourers to the fruits of their labour to tribal, later national, forms of ‘kingship’, represented by the agrarian societies of Egypt, Babylon, Greece and Rome. But that is another story. And covers the role of civil government to protect the rich from rival rich claimants to another’s property as well as the poorest claimants to the wealth created by others.

“A lot of writers in the “collapse” movement disparage trying to plan out a society in advance. Capitalist economists certainly hate the idea of a “planned society”, believing as they do in Adam Smith’s theory that everyone naturally operates in their own self-interest, and that doing so leads inevitably to social harmony – with the help of an invisible hand. It was and is a pretty wild theory, but it has served the merchant class well these past 230 years.”

Comment
I do not recognize this as a “theory” enunciated by Adam Smith. It is certainly a theory attributed to Adam Smith by modern economists and Gary Clausheide, of which I comment critically upon regularly on Lost Legacy. Briefly, Smith was not naïve about the “rulers of mankind”. His critical approach to feudal lords (and the allodial lords before them), to princes, sovereigns, and legislators, and, above all, to the “merchants and manufacturers” of his day (of whom he scarcely had a word of praise) is well known by all who have read more than a few tit-bit quotations, torn out of context, from his books, Moral Sentiments (1759) and Wealth of Nations (1776).

Gary Clausheide appears to be among the quotation seekers and not among the readers of the works of Adam Smith (a feature, I am sad to say, that is prevalent among too many modern economists, and not just “capitalist” economists).

Another Half-Quotation from Adam Smith

In The Australian, Tim Soutphomassane, under the name, ‘The Philosopher’ asks:

Should we donate more to earthquake victims? (HERE):

The Philosopher (philosophercolumn@gmail.com) takes his text from Adam Smith’s Theory of Moral Sentiments (1759'), and comments:

“Adam Smith, better-known as the father of modern economics, may appear an unlikely source of philosophical guidance. But in The Theory of Moral Sentiments, Smith asked his readers to imagine an earthquake swallowing up the whole of China. While "a man of humanity in Europe" would be moved to express his melancholy, he would, Smith argued, ultimately return untroubled to his ordinary life.

"If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren."

Smith's observations have perhaps lost part of their sharpness. Technology has made a mockery of distance. In the 18th century, the images and sounds of an earthquake's devastation could not have been broadcast into the living rooms of those on the other side of the world, as they are today.

Even so, for all the horror we may feel about the Haitians' hardship, how many of us have watched the late-night news update, only to slip quietly to bed for a good night's sleep? Maybe Smith had a point.

I do not mean to make anyone feel guilty, or more guilty, about not feeling deeply enough about the plight of the Haitians. Nor am I for a moment suggesting that we should withhold assistance or charity. If one has the means to do so, one should be giving generously to the Haiti aid appeals. Governments can afford to be magnanimous in such times.

However, Smith highlighted a truth about the limits of human sympathy. Our sense of solidarity with those who suffer is strongest when we consider someone else as "one of us" where "us" means something smaller and more local than the human race. Philosophers of obligation would remind us that we owe a special concern for the welfare of our families and compatriots.”

Comment
Regular readers of Lost Legacy will know what Tim Soutphomassane has done. He has taken a truncated quotation from Adam Smith and then made a case without bothering – or even not knowing – what Smith said next, in the same paragraph.

By misleading his readers in The Australian, a newspaper with a hight reputation as a serious and authoritative source (certainly a cut above the usual tabloids) he makes a few dollars from traducing the reputation of a real moral philosopher;

Here is the rest of the quotation about how “man of humanity” would really act in response to a calamity of an earthquake, in contrast to how Smith draws his listeners into a discussion, using the earthquake as an example (China was a year’s sailing from Britain at the time):

“Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.” (TMS III.3.4: 136-37)

Quite a different picture of the ‘man of humanity’, eh?

I suggest that Tim Soutphomassane read a little more before pontificating about the point that Smith was making.

UPDATE:
This comment arrived Monay 25 January but got 'lost' in publishing it:

"Extremely helpful towards a basic understanding of Smith's famous quote; thank you." (JMJanssen)

Thank you J. M. Jansen for writing to Lost Legacy. Much appreciated. Gavin

Adam Smith on Earthquakes and a "Man of Humanity"

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Matthew Bishop, US Business Editor of The Economist and Michael Green write for Philanthrocapitalism Blog HERE and have produced, I hope in innocence, what amounts, by implication, so far as their readers are concerned, to a scurrilous slur on Adam Smith:

“Philanthrocapitalism and the Heart Strings”

“Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment… And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance.”

Those words, written by the great British economist Adam Smith, seem strikingly wide of the mark at the moment, as millions of people around the world respond with generosity to the terrible misfortune that has befallen the people of Haiti. Twitter and Facebook are churning with tips on how to give and to whom to give. Governments, businesses and individuals the world over are all opening their wallets to help.

Although sometimes caricatured as a champion of selfishness for extolling the power of the ‘invisible hand’ of the market, Smith’s quote comes from his lesser-known work, The Theory of Moral Sentiments, in which he argued that it is our sympathy for others that motivates our good deeds. In the world without telephones and televisions that existed when he was writing, catastrophes on the other side of the world were abstract stories; today, we can see the suffering of others and do something about it. For that reason, Smith would not have been surprised by the way the public has responded to this latest crisis, and would have celebrated this as progress for humankind.

Smith would also have noted with pleasure that a massive earthquake in China in 2008 led to a dramatic change in attitudes to giving there, where the government had previously been hostile to philanthropy. Yet he might also have worried that the economy’s invisible heart led to philanthropic funds being misallocated by the surge of sympathy after high profile disasters, which often attract more money and in-kind gifts than can be used effectively on the ground, at the expense of less compelling but more effective uses of the donations.”

Comment
The above quotation comes from Moral Sentiments (1759) and, unfortunately it is only part of this paragraph that is often quoted by quotation-chasing, media folk in a hurry to make their point when earthquakes are in the news.

‘Tis a pity that Matthew or Michael did not quote the rest of the paragraph – maybe it was only partly quoted from their book of Smith quotations – for they would have gotten a whole new perspective on the Adam Smith they think they knew.

Here it is, right after where their truncated quote ends: “…would occasion a more real disturbance”:

“Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters” (TMS III.3.5: 136-37).

I suggest this shows a different take on Adam Smith’s insightful comment on how “a man of humanity” would react to an earthquake in distant China (then a year’s sailing from Britain and the same back).

Yes, the world has grown smaller today, but the same human spirit, extolled by Smith, is evident in what follows in the near-by Caribbean. I would wish that Matthew and Michael would spread that message about Adam Smith’s legacy on such occasions.

Adam Smith Quotations

Jonathan Schwarz writes in “A Tiny Revolution” (HERE)

“Once Again Adam Smith Betrays the Principles of Adam Smith”

“Several finance professionals just co-wrote a column for the New York Times saying this:

American workers are overpaid, relative to equally productive employees elsewhere doing the same work. If the global economy is to get into balance, that gap must close...the recession shows that many workers are paid more than they’re worth.

Here's Adam Smith, describing columns like this in The Wealth of Nations in 1776:

"In reality high profits tend much more to raise the price of work than high wages. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

Comment
I agree with Jonathan Schwarz that many people who write on Adam Smith are highly selective in their quotations from him, and also apparently unaware of the context in which his quotation appears.

This suggests that Adam Smith is more often quoted than read in the original from which they quote. Jonathan concludes: “I assume these people just never read anything”, and I agree.

It is not clear from Jonathan’s piece exactly on what grounds the “finance professionals” who contributed to the New York Times piece made their assertions about US productivity. However, it is not clear to me on what grounds Jonathan makes that particular quotation from Wealth Of Nations. *

From memory Smith's reference to the failure to mention the role of higher profits in determining high prices is part of his analysis of higher monopoly profits imposed on consumers by the colonial trade, a most protected business in British affairs, due to the imposed monopoly on the carriage trade (shipping) under the Navigation Acts and the application of marchnats' monopoly trade to and from Britain and Europe.

These monopoly practices enabled Britain to export to the British colonies in North America a wide range of consumer and producer commodities and to charge high monopoly prices in the absence of competition from European rivals.

Moreover, as all colonial exports had to be shipped in British ships with British crews, on the same monopoly basis, the same British traders were able to pay lower prices for colonial goods (nobody else was allowed to compete with them by paying higher prices), and, then charge British consumers high prices to buy the imports once landed in Britain (and other European consumers had to pay higher prices on goods off-loaded and transhipped to the continent).

Adam Smith exposed this highly-profitable, extended monopoly racket in Book IV of Wealth Of Nations. British and colonial consumers both lost out in the racket, though British ‘merchants and manufacturers’ gained from it.

That was Adam Smith’s point about the merchants saying “nothing concerning the bad effects of high profits” and for them blaming the fact of the relatively high wages of labour in the Colonies (compared to wgae sin Britian) on the high prices the merchants charged to British consumers for colonial imports.

It was a con, but Smith saw through it.

Therefore, I don’t think we can use these historical facts to justify, though perfectly warranted, criticism of the “finance professionals” who described US workers today as being “overpaid”. They may well be wrong, but so to Jonathan Schwarz may be wrong too, in selecting Adam Smith’s quotation to justify his criticism of the “finance professionals”.

Incidentally, this foreign-trade racket was highly profitable for thos merchants who risked the perils of the 18th century sea-trade. But some British merchants preferred not to take on the risks, despite the profits, and preferred for "their own security" to stick exclusively with domestic UK trade, which led Smith, having explained these circumstances clearly in Book IV, Chapter ii, paragraphs 1-9, to use the popular 18th-century “invisible hand” metaphor for those merchants who opted out of the colonial trade.

[Apologies for not supplying all the references here, but my Adam Smith library (Glasgow edition of the Works and Correspondence of Adam Smith, Oxford University Press) is in another place, temporarily].

Adam Smith on "Ruin of a Nation"

Ben Stein writes on “Four lessons from the recession” in (19 November) in Fortune HERE which includes this observation:

“And another little note ... my much-missed father used to tell me with great approval Adam Smith's famous quote regarding prophecies of doom for America, "there is a lot of ruin in a nation."

Comment
Another example of a famous quotation from Adam Smith being misapplied in meaning and, in this case, in its location too.

Smith was not writing of “prophecies of doom for America”, a country that did not yet exist when he penned his observation, which was a mild rebuke in fact to an excitable young correspondent overreacting to British reverses in the war of independence waged by the British colonists in North America.

The then young man was John Sinclair (1754-1835) of Ulbster and Thurso Castle, Caithness (in northern Scotland), educated at Edinburgh, Glasgow and Oxford, and called to the English Bar in 1775, aged 21. Sinclair wrote to Smith in 1782 (aged 28, I think, from memory), in a not auspicious year for the King’s course:

“If we go on at this rate, the nation must be ruined. Smith replied: “Be assured, my young friend, that there is a great deal of ruin in a nation” (Adam Smith, Correspondence of Adam Smith, 1977): p 262, note 3, from Sinclair, Corr., i. 390-1).

It most certainly was not a prophesy “of doom for America” – it was a young man’s ill-informed mood-panic about military reverses for the British (particularly the British surrender at Saratoga (Ian Ross, The Life of Adam Smith, 1996, 327; new, second edition about to be published by Oxford University Press).

The only thing likely to be ruined by the end of the war was the British monopoly of colonial trade, a prospect about which Smith was not worried at all. His Wealth Of Nations. Book IV, is a polemic against mercantile political economy, the central idea behind England’s (after, 1707, Britain’s) foreign policy in the colonies.

Ben Stein (and Fortune's sub-editors) slipped up in his attributed meaning to Smith’s wiser words to young Sinclair.

Self-Interest is Not Selfishness

In a post I made on 10 November (see below), Greg Baldwin posted a comment. I would normally just reply to the comment. However, I consider the exchange of wider interest and importance, and to avert it being missed by those who do not search for the rare comments Lost Legacy receives, I post the exchange of comments for wider readership:

“Greg Baldwin said...

Thanks for the comment. Secretly I want to believe that self interest and selfishness can be neatly distinguished, but I'll confess quotes like this from our friend Mr. Smith have not helped me to find the clear distinction:

"It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

`Adam Smith, Wealth of Nations’

I'm not sure I fully understand everything Smith is trying to say here, but self-love + self interest do seem to be at least the basic ingredients for selfishness...no?

What am I missing?"

To which I replied:

Hi Greg

Thanks for your comment.

Many people quote the “Butcher, Brewer, Baker” example from Smith’s Wealth Of Nations (WN I.ii.2: 26-27) without appreciating exactly what he was saying. He advanced the same example in the 1762-3 lectures (23 March, 176: vi.46: 348) that he gave in Glasgow University (Smith, Lectures On Jurisprudence, Oxford University Press/Liberty Fund: 1978), hence it was an early part of his oeuvre long before he wrote Wealth Of Nations.

‘Self-interest’ and ‘self-love’ in 18th-century discourse did not mean selfishness and were clearly distinguished.

Bernard Mandeville (1724) celebrated selfishness as a virtue (as did Ayn Rand in the 20th century). Smith regarded Mandeville’s teachings as “licentious” (Moral Sentiments, 1759: TMS VII.ii.4: 306-14)).

Examine the quote: we expect our dinner “from their regard to their own self interest”. But there are two people in each transaction: the hungry would-be diner and the shopkeeper potentially supplying the meat, beer, or bread.

Smith excluded the virtuous motive of their “benevolence” as too weak to rely upon regularly (as common sense suggests it would be, except at the margin). So how is the transaction to be conducted?

“We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

We don’t talk of our necessities in the transaction but address “their self-love” - they are self-interested too! They have gone to the trouble of securing supplies of “meat, beer, and bread” and offering them for sale to potential customers.

The earlier transactions of the “butchers, brewers, and bakers” to secure their supplies (from farmers and those along the supply chain) involved multiple transactions on the same basis. All suppliers need access to freely bargained exchanges to supply their families with their needs from others.

In the sentences immediately preceding the ones you quote, Smith wrote:

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.”
(WN I.ii.2:26)

This is a clear description of the bargaining processes by which we obtain “those good offices which we stand in need of”.

Each party is self-interested in the outcome, but (and it is an important ‘but’) neither can obtain what they want without addressing what the other wants in voluntary exchange transactions. Two utterly selfish egoists would seldom, if ever, come to a voluntary agreement – neither would give up anything in place of demanding their price “or else”.

As Smith put it, in social converation we “persuade” to get what we want. Highlighting why something (what we offer to give) is good for someone is often a good place to start when seeking what we want to get.

That is the meaning of the paragraph from which you take the well-known quotation (in the process of which you elide from the 18th-century meaning of self-interest and self-love to a later meaning).

To read this as Smith advocating selfishness is quite different from the intended and explicit meaning of Smith's moral philosophy, as expressed in that paragraph.

And that Greg is the answer to you question: “What am I missing?”

Another Great Smithian Metaphor

Peter Boettke writes in The Austrian Economists (HERE):

“Is Adam Smith's discussion of governmental "juggling trick" relevant to our policy discourse today?

Scott has already talked about this at The Economic Way of Thinking, but we should dig a bit deeper into the discussion from Smith's Wealth of Nations, Vol. 2, pp. 929-230. Smith argues in those pages that: (1) when the public debt reaches a certain level, the fiscal system is threatend, but there is not a single instance where a government has paid off the debt fairly and completely; (2) rather than pay down the debt with increased taxes, government's choose "pretended payment"; (3) the prefered method of pretend payment is repudiation through debasement of the currency; (4) this method extends the 'calamity to a great number of other innocent people'; and (5) rather than do the right thing -- which would be least dishonorable to the debtor, and least hurtful to the creditor -- government instead choses to engage in "juggling trick".

Comment
This is a case of the appropriate use of a quotation from Adam Smith’s Wealth Of Nations because it is still relevant, as government debt has increased significantly since the 18th century – in those days debt was raised mainly to fund wars or bribe foreign powers – whereas nowadays government debts fund just about anything that modern, BIG, governments spend taxpayers’ and lenders’ money upon.

Smith wrote while governments were happily inventing new forms of raising revenue for governments from the private economy. ‘Sinking Funds’ to pay-off debt soon became sources of new funds to spend more money, not always, if ever, wisely. Then they added, on a ‘temporary’ basis, income tax , and so it has gone on and on. Today, in Britain’s case, we have ‘stealth taxes’ and ‘quantitative easing’ (printing money), and unheard of levels of debt.

Smith observed that governments managed to avoid paying back all of their debt through various “juggling tricks” (beware: another one of Smith’s metaphors!).

Congratulations to Peter Boettke for picking upon Scott's (HERE) references to government debt and 'juggling tricks'.

I recommend that you follow the links.

Jacob Viner Confirmed

There were two articles this morning in Blogland worth a look over if you have a spare 20 minutes. Both discuss whether Adam Smith was really a Leftist, a view likely to become more common as Adam Smith's the so-called rightist views comes under challenge:

1 “Was Adam Smith the Anti-Capitalist?” by Thom Stark Here (7 Sept 09)
and
2: “Free-market activists distort original message of Adam Smith’s “invisible hand” by James Pyland HERE (11 Feb 2006):

Comment
Jacon Viner once remarked that it would be surprising if some writer could not claim support for his strange economic ideas from Wealth Of Nations. These articles exemplify Viner's remarks.

Myths About Charles Darwin and Adam Smith

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Len Hart writes the The Existentialist Cowboy Blog HERE:
and posts an article “H. L. Mecken Covers the ‘Monkey Trial’ “, in which includes the following:

“Interestingly, the term "survival of the fittest" was never used by Darwin”

“Evolution is often considered to be so true as to be trivial: what survives survives. Critics of Darwin will often cite the tautology though it does not support them; it supports Darwin. Species which survive pass on their genes as well as mutations. This is quite beyond debate. Every farmer who has bred for specific characteristics knows the truth of it. And every cowboy will tell you that if you kill a slow roach, you improve the breed. Evolution! Adaptation! Natural Selection! Some of the more subtle critics of "Darwin" say that "survival of the fittest" is a circular argument: the fittest are those who survive, and those who survive are deemed fittest. There are problems with that:

1. Darwin never used the term "survival of the fittest"! That dubious honor belongs to Herbert Spencer, a "Social Darwinist" who never understood Darwin, nor was he "social"!

2. Even if the term "natural selection" is more properly substituted for the bogus term "survival of the fittest", the argument is circular only if the invalid conclusion that "only the fittest survive" is added! The invalid value judgment –survival of the fittest –is falsely attributed to Darwin.”

Comment
I am not wholly in disagreement with Len Hart’s article (on the Scope’s Trial) but in the interests of protecting Charles Darwin’s legacy (much like I strive to protect Adam Smith’s legacy, Len Hart (NO DOUBT IN GOOD FAITH) distorts Daewin's legacy.

I have often seen the denial that Charles Darwin ever used the term: ‘survival of the fittest’; the statement's origins is more often associated with Herbert Spencer, yet Darwin mentions to ‘survival of the fittest’ several times in his book, The Descent of Man and selection in relation to sex, 1871, John Murray, London.

An example, one of several, is found in Chapter IV, “Of the Manner of the Development of Man from Some lower Form” (page 157 in the photoreproduction Princeton University Presss edition, 1981):

“In an area as large as one of these islands, the competition between tribe and tribe would have been sufficient, under favourable condition, to have raised man, through the survival of the fittest, combined with the inherited effects of habit, to his present high position in the organic scale.”

It is interesting to see myths that become "facts" merely by repetition as they spread round the world with an ease which are contrary to the real facts.

Clearly, the epigones re-presenting Darwin’s ideas, are like the epigones who have represented Adam Smith’s ideas since the 1950s, who have not cared to read the authors they imply they quote from with authority (in Adam Smith’s case some of the perpetrators of the myths received the accolade of Nobel Prizes).

It's best to remember that ther 'patron saint' of all students everywhere is St Thomas, also known as 'doubting Thomas'. I always warned first year students, and on occasion reminded final year students' never to trust what they were told by their lecturers, but always check for themselves by reading all references they asserted to justify their claims about what others were supposed to have written.

Surprised at Sloppy Notions for Chomsky

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From Noam Chomsky: Education is Ignorance (2 May) in W.E.A.L.L.B.E. here:

"David Barsamian: One of the heroes of the current right-wing revival... is Adam Smith. You've done some pretty impressive research on Smith that has excavated... a lot of information that's not coming out. You've often quoted him describing the "vile maxim of the masters of mankind: all for ourselves and nothing for other people."

Noam Chomsky: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits."

Comment
This is a long article and I wish to comment on other paragraphs, so I will focus on the above passage and return on other days to other posts.

Let me say first that Noam Chomsky is respected as a formidable intellectual with a lot of ‘hinterland’ as we say in the UK, and he says quite a lot about Adam Smith that you won’t find from many modern economists, because, as he says, few of them actually read Smith’s books. But if you put up this line of argument it is best if you show that you have read Wealth Of Nations well.

That he confesses he ‘read him’ but didn’t do ‘research’ is revealing and perhaps explains why his interpretation, given with that certainty that comes from a certain kind of intellectual bully, is actually misleading on the issue of Adam Smith and the division of labour, a common enough error among most of the Left.

Smith was a moral philosopher; he observed everything but did nothing. He didn’t bring to his work a preconceived set of prescriptions and apply them to his study of commercial society in the context of 18th-century Britain. He described, taking the long-view of history as well as his reading about and visiting fairly primitive work places to see how the division of labour increased labour productivity. And not just in the pin factory (‘a very trifling manufacture’; p14). He also, and perhaps of greater significance, he described the ‘accommodation of the most common artificer or day labourer in a civilised and thriving country’ (p 22). Here he described the long supply-chain, including its international dimensions, that produced the common labourer’s ‘woollen coat’, the ‘produce of the joint labour of a great multitude of workmen’.

Yes, the national and international division of labour is ‘wonderful’. It operated in Smith’s day without ‘central planning’, ‘central direction’, and without the help of university professors from either Glasgow (1461) or Harvard
(1636), or the sovereigns of any kingdom, or legislators and those who influenced them, in the few places where they existed.

Having discussed the division of labour and its commercial consequences in Book I of Wealth Of Nations (it created, among other things, the wealth that enabled Scotland and a British colony in North America to divert some portion of their ‘annual output of the necessities, conveniences, and amusements of life’ to the employment of professors to educate young men – no girls! – to add to the human capital of what were for many decades (in Scotland, for centuries) humans otherwise bereft of learning and sunk in ignorance.

Chomsky notes: ‘But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.’

Now, some parts of this sentence are fine, some parts woefully wrong, and almost all of it out of historical context. I have no idea how a Harvard professor managed to attack those who ‘read the first paragraph of The Wealth of Nations’ but do not ‘get to the point hundreds of pages later’ (768 actually), and yet manifestly misleads his readers as if he hasn’t read Book V himself with the due care and attention we expect from Harvard undergraduates, let alone its senior faculty.

The relevant section reference is ‘Article ii’, ‘Of the Expense of the Institutions for the Education of Youth’, pages 758-88, of Book V of Wealth Of Nations, and the relevant page is 782 (from the Glasgow Edition, Oxford University Press):

“In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (WN V.i.f: 782)

The education of youth is a long and important part of Wealth Of Nations. In it Adam Smith presents a detailed description of the history of education from classical times to its then state in Britain. The first notable feature was that only boys were formally educated for a few years; girls were left to their parents to ‘home educate’, which for the majority meant no education at all (their parents were likely to illiterate and general ignorant).

Across Britain the picture was patchy. England was largely backward educationally. It had two universities, Oxford and Cambridge, but local schools were rare. In Scotland, there were four universities, Edinburgh, Glasgow, St Andrews and 'Aberdeen'. But local provision for education since the 17th century was managed by ‘little schools’ in most parishes, paid for by a mixture of charitable sources, local contributions and donations. Most male children spent a year or more, some ‘bright’ children up to age of 14. Middle class boys tended to stay longer than the children of the poor, most of whom were sent to work from about 8, their parents near destitute.

Smith describes this in Book V. In fact, he offers the ‘little school’ system in Scotland as suitable for England too (a much larger country in population and wealth than Scotland). He envisages all children spending some time learning the ‘read, write and account’ to extend literacy across the majority of children (he left open the question of education for girls, but clearly they could be accommodated in the ‘little school’ system).

Book V is about government expenditure and revenue. How was education to be funded? The government would have to play a serious role in such a project, which meant taxation of a relatively narrow taxation base. At the time taxation was a sensitive subject (it was ever thus) and the people who would have to consent to such an additional expense (‘little schools’ would need to be built, which with 60,000 parishes was no mean line item in a budget) were the legislators, mainly representative of the agricultural aristocracy and few ‘improving’ landlords.

If Chomsky re-reads the paragraph quoted above he will note two themes in his argument. The first, which Chomsky has focused upon, is that of the deleterious effects of the division of labour, which were of longstanding antiquity (the division of labour preceded commerce by many millennia back into pre-history).

Farm labourers were marginally ‘better off’ than the fewer primitive factory labourers, hauliers, seamen, servants and soldiers, and etc. But be clear, the outdoor farm labourers were not all dancing round May Poles and living as happy families on the prairy. Theirs was a hard life, short too, with infirmities and early deaths from disease, incapacity, accidents and starvation.

Into this background Smith raises the ‘man whose whole life is spent performing a few simple operations’ and the consequences in his stupidity and ignorance. He does not raise the spectre of millions living their awful rural lives in similar terms – his appeal is to support from the few rich men who owned the farms.

He also turns his argument neatly as his second theme. If the sources of finance for education (mainly the aristocrats) were not inclined to support the ‘little schools’ from their usual selfish inclinations to prodigality, then it would be useful to appeal to their fears of disturbances to their sheltered lives – the steady decline in martial prowess of the uneducated mass of poorer men (and Smith knew how to write well).

For the indigent labourer whose ‘torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life' could be written as a major threat lurking everywhere. Moreover, ‘Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war.’ If not inclined to rebellion, his services in defence of the island country could be useless.

These concerns were meant to strike a chord with that class of taxpayers who were fearful of weak armies and of easily misled labourers who might become rebellious (such rebel ‘mobs’ had forced the British army out of the colonies).

In short, Smith was 'spinning', as we say today, a case for increased taxation to pay for public institutions regarded as deficient in 18th-century Britain. That he was doing so 768 pages after the ‘pin factory’ was deliberate, Few of his readers would have the faintest idea of what went on in a factory and his prose was powerful because it pushed all the right buttons to rouse the rich readers from their complacency – and not a little hostility – about the plight of the children of labourers.

Chomsky has not considered this context. Hence, he can decry the division of labour and assert with conviction that it ‘will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be’, but not with much credibility. He apparently has no idea of how ignorant were the members of the majority of ordinary labouring families in the 17th and 18th centuries, let alone the millennia before then.

Empirical evidence beats speculation. Was the result of the division of labour, even through the horrors of the industrial revolution of the 19th century, a nation of people who were turned into ‘creatures as stupid and ignorant as it is possible for a human being to be?’

When Adam Smith wrote Wealth Of Nations (1764-1776) he did not have a vote under the existing franchise – in fact he never had a vote – but by the late 19th century, literacy levels were at unprecedented higher levels, ignorance was not the norm, and trade unions were beginning to exercise their functions, and were led by working men who could do a lot more than ‘read, write, and account’.

By exaggerating his case with colourful prose, few facts, and no history Chomsky undermines those parts of his case that are worthy of our attention. I shall examine the rest of his article over the next few days to see whether he can be taken seriously.

Self-Interest is Not Always Benign

A regular correspondent writes:

‘I don't know if you take requests, but I would love to see one of your posts on the recent interview at the Freakonomics blog about "The Invisible Hook", a new book about the economics of piracy. Here's the link:

Here is the quotation from the Freakonomics article on piracy:

"In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

Comment
The first question is easy: I am delighted to respond to requests about any subjects related to Adam Smith’s Lost Legacy. I receive these regularly by email and I usually replied privately by correspondence, but there is no inhibition on my part from replying via ASLL.

I have also read the article by Freakonomics in the New York Times (link above) and my initial response to the sentence: ‘The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest', was incongruity.

Who suggests that criminals do not act according to their self-interest? Of course they do. They certainly do not act for anybody else’s interests!

When Mugabe authorises maltreatment of opponents by his hired thugs, he acts in accordance with his self-interest as he sees them. Indeed, Adam Smith gives 60 instances of people acting according to their self-interest but not in the interests of others in Books I and II of Wealth Of Nations, and these people’s actions certainly did not benefit society as a whole, nor were they intended to do so.

That’s part of the problem with the Freakonomics’ approach: it seeks the rational motives behind people’s actions, when rational decision-making can have non-beneficial consequences for those affected by the decisions. But the Freakonomics authors, ingenious as their explanations often are, sometimes fail to find unanimity in the decision makers’ cohorts – not all members of a cohort, sharing, say, the same characteristics as gang members, become gang members, or take drugs, get pregnant, or kill anybody.

So the pirates ‘driven to build systems of government and social structures that allowed them to better pursue their criminal ends’ is only part of the story.

Smith noted a significant and relevant point in this regard:

‘Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.’ (TMS II.ii.3.3)

Now, pirates in the 17th and 18th centuries were composed of experienced seamen and their officers. The learned their trade as seamen in the merchant marine and the Royal Navy. Both sections of the shipping business had many shared customs, some of ancient vintage. For example, in times of severe scarcity, food from a captured seabird’s carcass was divided among the crew by the venerable system of ‘who shall have this?’ and not by the captain’s prerogative.

One seaman turned his back of the divided segments of the bird and another seaman pointed to a piece of dismembered bird and asked ‘who shall have this’. The crew member who could not see what his colleague was pointing at would shout out a name, and that piece, whatever it was – beak, feathered tail, webbed feet, or succulent breast – was allocated to the man whose name was called out. This happened to Captain Bligh and his boat crew after the mutiny – the men were amused (quietly) when Bligh received the feet on one occasion.

So, much of the so-called drive ‘to build systems of government and social structures that allowed them to better pursue their criminal ends’ which were merely simple rules for self-preservation, and, as Smith put it: ‘any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another’, because ‘the prevalence of injustice must utterly destroy it.’

Now fast forward to Somalia and the pirate menace to shipping.

The first big difference is that 18th-century pirates sailed large, self-sufficient, and well-armed and fast ships, crewed by excellent seamen, and captained by proven leaders who could keep the crew in order according the conventions among pirates. Everybody received a share of the loot according to their station (much like Prize Money paid by the Royal Navy for captured foreign vessels).

The Somalia pirates are in a different league; their ships are less seaworthy, their crews number a half-dozen men, and the ships they board are defenceless largely. Their leaders, judiciously, are on shore, not on the little boats. They take the bulk of the loot obtained – ‘independents’ are rare – and they launder the vast sums with the efficiency of banks through high-level international contacts. When a heist goes wrong, it’s the boys in the bum boats who die, not the shore-based quasi-bankers.

‘For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively’.

Pirates do not create nor destroy wealth; they redistribute it. Plunder as an alternative to wealth creation is as old as, if not older than, voluntary exchange. Hijacking a lorry full of merchandise is not different that sea-born piracy and regularly happens inside all major economies.

The nature of an activity does not alter the self-interested activity of criminals, polluters, spoilers of the commons, kleptomaniac African (or Russian, or Prohibition Mafias), and petty thieves in supermarkets.

What Freakonomics adds to what we know about self-interested actions, for good or ill, I am not qualified to comment, but on the piracy phenomenon, I am not impressed.

Smith on Morals of Competition

John E. Hill writes a comment to an article, ‘Adam Smith would be appalled’ in The Boston Globe (20 April) HERE:

‘GORDON MARINO hit the nail squarely on the head with his op-ed "The business of business ethics." But he did not hammer the nail hard enough. Adam Smith, considered the father of capitalism, wrote, "In the race for wealth, and honors, and preferments, [one] may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors." But Smith added that one should not harm another in the process.

Surely Marino's critique of investors "taking unconscionable but legal risks with other people's pensions and life savings" means that hundreds of thousands of people have been harmed. And isn't the opacity of the instruments used to essentially defraud people of their pensions an impediment to the transparency needed for a truly free market?

The greedy Wall Street manipulators have violated not only ethical principles but also the free-market principles of Adam Smith.

Comment
John Hill should quote the full passage following the sentence he quotes to make clear and definitive the particular point that Smith makes (though congratulations to John Hill for spotting the basis of Smithian moral conduct in competition):

‘In the race for wealth, and honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of. This man is to them, in every respect, as good as he: they do not enter into that self-love by which he prefers himself so much to this other, and cannot go along with the motive from which he hurt him. They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation. He is sensible that he becomes so, and feels that those sentiments are ready to burst out from all sides against him.’ [TMS II.ii.2.1: 83]

The Man of Public Spirit Praised by Adam Smith

I was asked recently by a correspondent if I knew of anything written by Adam Smith on ‘public spirit’. I replied:

It depends of what is meant by 'public spirit'. I assume it is something to do with acting in a manner that has public welfare benefits.

Adam Smith addressed this possibility in The Theory of Moral Sentiments (1759). To understand Smith’s idea, you should read the whole of chapter 1 in Book IV, in which he discusses the role of 'beauty' in relation to 'utility', and asserts that the beauty of a contrivance is more valued than its utility (which he claimed, uncharacteristically, as his original development of an idea from David Hume).

First, he sets out his proposition that the ‘fitness’ of a contrivance is valued more than the ‘very end for which it is intended’ by giving everyday examples of disordered chairs in a room which the owner would tidy up angrily, though it makes no difference to their utility as chairs; and of a two-guinea timepiece that runs two-minutes slow, so that the owner buys fifty-guinea watch that runs only second slow, but which runs perfectly for its the possessor. Or a hovel, which keeps the inhabitants dry, compared to a palace that does the same task and costs immense amounts of money, but enhances its owner’s prestige

This leads him to discuss the parable of the 'poor man's son whom heaven in its anger has fired with ambition', who is driven to work hard to become rich because he imagines the rich have the means to happiness. It also covers the rich landlord who surveys his fields and feels good, even though he cannot eat any more than poor man.

Having noted the significance of these delusions, Smith describes their social implications: these are the delusions that created civilisation.

He then turns to the ‘public spirited’ man and discusses what drives such a man; Smith asserts a driver is his admiration for the workings of a great society, which incentivised him to devote his time and his own money to improving society in some manner to make it even better. And it is appropriate that they should do so. It is not all down to a stark choice between that perennial antipathy of private enterprise versus public spending. There are additional sources of enterprise that are significant today.

Individuals can be affected by a sense of public spirit to bring about improvements in what private and public spending has done, so far, on their own. Apart from foundations that disperse funds to what they consider worthy ends and charities that mobilise resources to fill gaps in current provision, there are publicly-spirited individuals who make donations to selected objectives or take the initiative to undertake beneficial public projects on their own account. All these, and others, are well within the ambit of Smithian political economy for commercial societies.

Here is Smith’s (much neglected) explanation of the efficacy of ‘public spirit’:

“The same principle, the same love of system, the same regard to the beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public welfare. When a patriot exerts himself for the improvement of any part of the public police, his conduct does not always arise from pure sympathy with the happiness of those who are to reap the benefit of it. It is not commonly from a fellow-feeling with carriers and waggoners that a public-spirited man encourages the mending of high roads. When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police, the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. From a certain spirit of system, however, from a certain love of art and contrivance, we sometimes seem to value the means more than the end, and to be eager to promote the happiness of our fellow-creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy. There have been men of the greatest public spirit, who have shown themselves in other respects not very sensible to the feelings of humanity. And on the contrary, there have been men of the greatest humanity, who seem to have been entirely devoid of public spirit. Every man may find in the circle of his acquaintance instances both of the one kind and the other. Who had ever less humanity, or more public spirit, than the celebrated legislator of Muscovy? The social and well-natured James the First of Great Britain seems, on the contrary, to have had scarce any passion, either for the glory or the interest of his country. Would you awaken the industry of the man who seems almost dead to ambition, it will often be to no purpose to describe to him the happiness of the rich and the great; to tell him that they are generally sheltered from the sun and the rain, that they are seldom hungry, that they are seldom cold, and that they are rarely exposed to weariness, or to want of any kind. The most eloquent exhortation of this kind will have little effect upon him. If you would hope to succeed, you must describe to him the conveniency and arrangement of the different apartments in their palaces; you must explain to him the propriety of their equipages, and point out to him the number, the order, and the different offices of all their attendants. If any thing is capable of making impression upon him, this will. Yet all these things tend only to keep off the sun and the rain, to save them from hunger and cold, from want and weariness. In the same manner, if you would implant public virtue in the breast of him who seems heedless of the interest of his country, it will often be to no purpose to tell him, what superior advantages the subjects of a well-governed state enjoy; that they are better lodged, that they are better clothed, that they are better fed. These considerations will commonly make no great impression. You will be more likely to persuade, if you describe the great system of public police which procures these advantages, if you explain the connexions and dependencies of its several parts, their mutual subordination to one another, and their general subserviency to the happiness of the society; if you show how this system might be introduced into his own country, what it is that hinders it from taking place there at present, how those obstructions might be removed, and all the several wheels of the machine of government be made to move with more harmony and smoothness, without grating upon one another, or mutually retarding one another's motions. It is scarce possible that a man should listen to a discourse of this kind, and not feel himself animated to some degree of public spirit. He will, at least for the moment, feel some desire to remove those obstructions, and to put into motion so beautiful and so orderly a machine. Nothing tends so much to promote public spirit as the study of politics, of the several systems of civil government, their advantages and disadvantages, of the constitution of our own country, its situation, and interest with regard to foreign nations, its commerce, its defence, the disadvantages it labours under, the dangers to which it may be exposed, how to remove the one, and how to guard against the other. Upon this account political disquisitions, if just, and reasonable, and practicable, are of all the works of speculation the most useful. Even the weakest and the worst of them are not altogether without their utility. They serve at least to animate the public passions of men, and rouse them to seek out the means of promoting the happiness of the society.”

[Theory of Moral Sentiments, Book IV.I.II pages 185-87 (Glasgow Edition, Oxford University Press, 1976; Liberty Fund edition, 1982)]

Thought for the Day 2

‘Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.'
(TMS VI.i.6: 213)

Comment
I have made many references to the use by Adam Smith of the metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) and I thought it relevant to quote the above passage from Smith’s Moral Sentiments [1759, ed 6. 1790].

He discusses security and specifically mentions how security is ‘averse’ to exposing ourselves and ‘our health, our fortune, our rank, or reputation to ‘any sort of hazard’.

I was recently criticised by a academically respected referee for using the more modern term, ‘risk averse’, to describe the motivation for why some (but not all) merchants, discussed by Smith in Chapter IV (ii.9: 456) of Wealth Of Nations, preferred to trade and invest locally rather than take the risks of trading or investing abroad, particularly in the American colonies.

The referee considered ‘risk-averse’ as being about the utility functions of players in modern game theory and not applicable to the merchants that Smith identified in his famous ‘invisible-hand’ paragraph.

Despite my reservations, I accepted the referee’s assertion, not being able to lay my hands of the relevant quotation at the moment I needed it. But I found it this morning while looking for something else.

I consider Smith’s comments on the ‘prudence’ of ‘security’ and ‘aversion’ excuse my original mentions of ‘risk aversion’ as the direct cause of these merchants investing locally and thereby, on the arithmetical law that the whole number is the sum of its individual parts, the behaviour of these merchants, which unintentionally made domestic national output and employment larger in total than it otherwise would be, completely explain what motivated them to do so.

The outcome was brought about, and is eminently explained by the causes identified by Adam Smith before he used The Metaphor of 'an invisible hand', thus making The Metaphor redundant as an explantion, and with its redundancy ,all the subsequent chatter that The Metaphor itself was an explanation are shown to be wrong.

The modern myths of invisible and disembodied hands, including the 'Hand of God' and other mysteries, were not part of Adam Smith's original explanation for the phenomenon, the merchant's 'risk-aversion' ('he intends only his own security' (WN IV.ii.9: 456).

The real mystery, in my mind, is why so many respectable and senior fellow economists can read the same passage from Wealth Of Nations and endorse the modern myth.

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct, without implying any connections to elements of modern games theory.

Thought For The Day

‘What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to’.
[Adam Smith, Moral Sentiments: TMS IV.2.1: 187; 1872 edition: pp 165-66]

Comment
Adam Smith was quite right. Utopian proposals and plans for reform that do not take account of human nature are prone to derision, if advocated, and to disappointment if implemented, and the unintentional results are obvious for all to see and suffer from.

As neat a description of party politics as could be offered for the many failings of governments. The only barrier to ‘human wickedness’ (which covers a multitude of crimes of commission and omission) is that of the system of justice, separate from government, and safeguarded by Liberty – democracy is a necessary but not sufficient condition (they ‘elect’ cruel dictators don’t they?).

Poor Essay Quality Discredits Educational Value

Mark Vargus, described as a San Diego Economy Examiner, writes a regular series in the Examiner.com (HERE) :

‘Self-interest and greed, the economic driver according to Adam Smith’.

“When Adam Smith started his study that eventually became the book "Wealth of Nations" he was a professor of political philosophy at the University of Edinburgh. Perhaps because of his experience with philosophy he theorized that men were driven by what he called "enlightened self-interest and greed" and wrote that people would act according to that drive.

Today, the original meaning of that phrase "enlightened self-interest and greed" receives wildly different definitions depending on the economist and his interests. Its not difficult to come up with more than a dozen interpretations of what would be the drive for a human. However, I find that the solution starts with considering how a person of Adam Smith's time viewed the world around him.”

Comment
I read essays from examiner.com fairly regularly. I am not sure what their business model is, but I have the impression their academic model is of poor quality, and, therefore, generally refrain from commenting on their essays.

However, taking a break this morning from my other work, I could not resist noting that Mark Vargus is particularly off-track in his above ‘essay’.

For a start, Adam Smith was never ‘a professor of political philosophy at the University of Edinburgh’, nor indeed was he ever a ‘professor of political philosophy’ anywhere else. Wrong town, wrong chair.

He gave some private lectures in the city of Edinburgh during 1748-51, from which he earned £100 a year, sponsored by Henry Home Kames, later Lord Kames after he became a judge.

Smith’s first chair was the chair of logic 1751-52, when the transferred to the chair of moral philosophy in 1752, both at Glasgow University.

He did not theorize ‘that men were driven by what he called "enlightened self-interest and greed". He certainly theorized about ‘self-interest’; the ‘enlightened’ bit was added by modern presentations of his philosophy.

He never ‘theorised’ about ‘greed’, except to criticise the idea that ‘greed' had any redeeming features, especially as it had been presented by Bernard Mandeville (‘Fable of the Bees: Private Vice, Public Virtue’, 1714/32), with whom Smith is often confused by modern essayists, and especially by Hollywood scriptwriters and not a few academics, who should know better.

To consider ‘how a person of Adam Smith's time viewed the world around him’ it would be a good place for Mark Vargus to start by reading what Adam Smith actually wrote about.

Overcoming my normal modesty, I suggest he reads my book, Adam Smith: a moral philosopher and his political economy’, Palgrave Macmillan, 2008, or, better still, he should read Smith’s ‘Theory of Moral Sentiments’ (1759) and ‘An Inquiry into the Nature and Causes of the Wealth Of Nations’ (1776). He could usefully read the best biography of Adam Smith, such as that of Ian S. Ross: The Life of Adam Smith, 1995, Liberty Books, Indianapolis (student-budget edition).

Only then should Mark Vargus (and the rest of the team at Examiner.com) write essays for students who rely on him to be a competent teacher about Adam Smith’s ideas.

Meanwhile, if the scheme's business model involves payment, then anybody tempted to pay for these essays, should hold off with their cash.

In today's world, these essays are, factually, toxic.

Adam Smith and Greed

Richard Gwyn writes on: ‘Unchecked, unregulated greed breeds corruption’ in the Toronto Star HERE:

“Capitalism is about greed. It's not exclusively about that. It's also about creativity and independence (the alternative to the market is some form of bureaucracy), providing a service or good that people need, and about providing jobs.

But greed is the motor that powers capitalism. Way back in the 18th century, Adam Smith understood this when he wrote in The Wealth of Nations that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us.
Smith, though, also wrote a second book, one that he regarded as far more important. Its title was The Theory of Moral Sentiments. In it, he tried to come to terms with the ethical consequences of unleashed greed and self-interest.”

Comment
In what is a familiar story line, at least to readers of Lost Legacy, Richard asserts, as if it is self-evident (though not to the ultra-poor masses of unemployed labourers and their families in large swathes of the planet, looking in on the life-styles of the vastly richer peoples of Canada) that ‘greed is the motor that powers capitalism’.

Richard goes ‘way back’ to the 18th century when almost the whole world was stuck in poverty, superstition, disease that carried off most children who were born, and those who ‘survived’ had the luxury of living, if ‘lucky’ to the ripe old age of about 40.

Murder rates per thousand were higher than the most gang-ridden modern slum towns, illiteracy was almost total, and the ground where you first stood on (if you survived infancy) was the only ground you would ever know. Richard should ask himself: where would he rather live – in the slums of Mumbai or rural Darfur or the slums of Toronto?

His evidence for ‘greed’ apparently comes from his misunderstood point that Adam Smith allegedly made in that famous partial quotation ‘that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us’.

Actually, it was about the ‘Butcher, the Brewer, and the Baker’ from whom Smith observed that it was a more reliable way to get the ingredients for your dinner (obviously 18th century nutrition was not as well catered for in Scotland at the time, which is why many Scots left out shores for Canada, including my maternal grandfather, a coal miner, for Toronto) to appeal to the self-interests of said ‘Butcher, the Brewer, and the Baker’, rather than telling them solely about your self-interests or needs.

Why was this so significant?

Well, merely considering your own self-interests was unlikely to persuade them to serve you; two parties only intereted inn themselves cannot conclude a bargain, as Smith makes clear in the same paragraph that Richard misquotes:

‘He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ (Wealth Of Nations, I.ii.2: pp 26-27)

What is greedy about applying the observed offer to exchange what you have (money) for what he has (ingredients for your dinner)?

Smith did not quite write ‘a second book’ – The Theory of Moral Sentiments was in fact his first book (1759 – 17 years before Wealth Of Nations, 1776). In it he did not try ‘to come to terms with the ethical consequences of unleashed greed and self-interest’. He discussed how people behaved, well, kindly, or otherwise.

He discussed morality, including the morality of the historic development of property and its consequences, particularly the division of labour and the creation of complex supply chains that, from productivity. raised the ‘meanest labour’ in Scotland into higher standards of life than the most powerful ‘kings of Africa’ and North America, including around the area that became Toronto.

In fact, Smith decried the philosophy of Bernard Mandeville (1732), who claimed that ‘Private Vice was Public Virtue’, and he described it as ‘licentious’ and stated that Mandeville’s assertions about the benefits of greed were wrong in practice and in philosophy.

Richard aims at the wrong target. He might care to reflect on the basis for his assertions about Adam Smith.