Bernard Mandeville and Adam Smith

Jan Peter Hammer is reported on ArtDaily.org HERE

Jan Peter Hammer produces a ‘U-tube’ video cameo asserting, wrongly, that Adam Smith’s use of the “invisible hand” metaphor was an “off-shoot” from Bernard Mandelson’s (1705-1724) ‘Fable of the Bees, Private vices, Public benefits’ theme. It wasn’t.

“The Fable of the Bees by Jan Peter Hammer at Supportico Lopez in Berlin”

“The Fable of the Bees by Jan Peter Hammer is an exhibition based on the 1705 poem by Bernard Mandeville “The Fable of the Bees: or, Private Vices, Public Benefits.” In his poem and ancillary prose Mandeville brings into being the counter-intuitive argument that better people make the world a worse place, since so-called vices such as egoism or greed stimulate social prosperity, whilst altruism or honesty result in collective atavism and disinvestment. In spite of the harsh reception of Mandeville’s work, which gave great offense to contemporary readers, his core idea that private vices lead to an increase in public benefits was later recovered and popularized by the British Utilitarian School. Adam Smith’s “invisible hand” parable is an off-shoot of Mandeville’s fable minus the cynical crudeness, with an added veneer of scientific respectability that makes the argument much more palatable and less contentious. Fables and parables are moral tales whose aim is to instruct, each of which contains a lesson to be learnt by its readers. Though 18th century’s classical political economy embraced a moralizing function, economics has since gone to great lengths to hide its ethical foundations. Claims of neutrality notwithstanding, choices of economic policy remain largely political.

In Jan Peter Hammer’s eponymous video “The Fable of the Bees” – shot in the guise of a You Tube home-made production – an eager young professional unwittingly channels Mandeville’s reasoning, providing a good illustration of the adage that “practical men who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”(J.M. Keynes)”

“That Which Is Seen and That Which Is Unseen” is a title borrowed from Frédéric Bastiat’s 1850 text “Ce qu’on voit et ce qu’on ne voit pas”, in which Bastiat lays out yet another parable, the “parable of the broken window”. Positioning himself against Mandeville’s notion that destruction brings net-benefits, Bastiat states that, “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.”

Comment
Two erroneous ideas may make a passable ‘U-Tube’ video that amuses viewers, but art is not necessarily history, nor instructive. Adam Smith did not deduct Mandeville’s “cynical crudeness” to add a “ veneer of scientific respectability” to make Mandeville’s “argument much more palatable and less contentious”.

He dismissed Mandeville’s satire as a “licentious System” and regarded it in “almost every respect erroneous” (Moral Sentiments, Book IV, Chapter 1.10.185); which should be read to appreciate Smith’s rejection of it in every respect). He attacked his ideas about vice and vanity as being wholly vicious, and a “mere offspring of flattery begot upon pride”. He concedes that Mandeville “once made so much noise in the world” because “in some respects [it] bordered upon the truth”, which is necessary to “deceive us” and “yet [it had] no foundation in nature, nor any sort of resemblance to the truth”, much like the “groundless and absurd fictions” about a “distant country” (which the 18th century abounded in). Such authors, concluded Smith, “appear absurd and ridiculous [even] to the most injudicious and unexperienced reader”.

Adam Smith’s “invisible hand” was never a “parable”, nor an “off-shoot of Mandeville’s fable minus the cynical crudeness”. Treating his use of a metaphor as a parable confuses a figure of speech in English grammar with a moral-type of “story”. How this particular and common 17th-18th-century metaphor became mythical story in modern economics, has to do with those neo-classical economists from the 1940s who felt a need to give their direct opposition to Soviet central planning by invoking the credentials of market solutions for problems of economic growth, living standards, innovation and technologies, in which they felt (rightly) that capitalism was far superior to communism. The Soviets had Karl Marx as their fount of wisdom; western economists rediscovered a mythical Adam Smith who had nothing to do with the Adam Smith born in 1723.

Marxists disparaged Adam Smith; neo-classical economists invented a role for the invisible hand metaphor and ascribed their inventions (wrongly) to Adam Smith by asserting that the invisible hand operated in the “miracle” of markets (but without showing precisely what it did and without a term for it in any of their mathematical abstractions). Marxist theorists simply side-stepped the “wonders” of “an invisible hand”, saying that central state planners replaced the market’s invisible hand (see Oscar Lange: ‘Economics of Socialism’, 1937 and 1947).

Keynes may have been right about “practical men” being “the slaves of some defunct economist”, though neoclassical exponents of “invisible hand” myth are the slaves of a wholly invented role for a lowly metaphor that has nothing to do with Adam Smith (see Warren Samuels, “Erasing the Invisible Hand: essays in an elusive and misused concept in economics” 2011 – and Lost Legacy, passim).

Jan Peter Hammer’s quotation from Frédéric Bastiat’s 1850 text “Ce qu’on voit et ce qu’on ne voit pas”, is interesting. It is not clear what Jan Peter Hammer makes of what Bastiat was saying: “the first [effect] alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.” This formulation has nothing to do with the “invisible hand” metaphor.

In both cases of Smith’s use of the IH metaphor its object is clear (but unseen). In Moral Sentiments, the rich landlord is led to his action in feeding his dependent serfs (“the thousands he employs”) by his unseen dependence on their toil (‘no food, no toil’), but the consequences of his action are seen in the subsistence paid to his toilers and their families, which results in the “advance of society and the multiplication of the species” (‘no toil, no food’) (TMS IV.1.10: 185).

In Wealth Of Nations, those insecure traders who prefer to invest in “domestic industry” rather than risk investing in “foreign trade” (unseen attitudes to risk), which unseen motive results in higher and seen “domestic revenue and employment” (WN IV.ii.9: 456). Bastiat’s quotation is about seen causes and unseen consequences, while in Smith’s use of the IH metaphor, the causes of being led are unseen; the consequences are seen. The IH metaphor describes these relations in a “more striking and interesting manner” (Adam Smith, Lectures in Rhetoric and Beller Letters, [1762] 1983, p 29).

Smith’s point was specific too: both the landlord and the investors act without “intending, without knowing” the consequences of their actions (Moral Sentiments, TMS IV.1.10: 185), and a risk averse investor acts to “promote an end which was no part of his intention” (WN IV.ii.9: 456). In neither case can we see the cause, but we can see the consequences in both cases.

I am all for art and such-like creative endeavour as demonstrated by Jan Peter Hammer, but let's keep my feet on the ground, not in the clouds, when it comes to interpreting historical licence from artistic subjects.

Small Steps in the Right Direction

James Higham writes for Orphans of Liberty HERE

James covers some of the distorted ideas about Adam Smith, especially about markets and morals. He picks up the distortions of Smith in the “concept” of the invisible hand and the claims of Ayn Rand (and her mentor, Bernard Mandeville, 1724, in “Private Vice, Public Virtue”, today known as the “greed is good” school of mindless radicalism.

“Adam Smith”

“Thought this a most significant take on Adam Smith who, like all great ideas people who’ve influenced humanity, has been partly read and misread as has been people’s wont and their own prejudices:
Smith saw economics as a branch of moral philosophy, and he saw capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics.
The notion of classical liberalism certainly embraces economic freedom but it also embraces that pesky bit “unless/until it is to the detriment of others”. Cue the moral dimension.

A great deal of contemporary (neo-classical) economics can be understood in terms of translating Smith’s Invisible Hand metaphor into a systematic theoretical form, with a particular emphasis on the economic efficiency of perfectly competitive markets.

However the popular view of Smith that has resulted from this emphasis is twice distorted.

Firstly, it is based on the narrow foundations of a few select quotations from The Wealth of Nations (WN) that are taken in isolation as summing up his work (Smith only mentions the ‘all important’ Invisible Hand once), and secondly these quotations have been analyzed in a particularly narrow way.

Both selection and interpretation have been driven by contemporary economists’ interest in justifying orthodox economic methodology and their peculiar (Mandevillian) assumption of the selfish utility maximising homo economicus.

And that’s the nub of the matter.

But anyone who cares to read Smith’s Wealth of Nations for themselves will find an economics discussed and justified in explicitly moral terms, in which markets, and the division of labour they allow, are shown to both depend upon and produce not only prosperity but also justice and freedom, particularly for the poor.

This is more than just a philosophical nicety and sets it at odds with the Randian dystopic view of freedom, the free market’s motivation and the cold indifference of the amoral “business is business”. This extremist position is a central plank in the platform of the crony capitalists and justifies all the corruption and I’m all right, jack of the Dimons et al.
It has zero to do with classical liberalism. “

Comment
Steps in the right direction are always welcome away from the neo-classical inventions of an Adam Smith not born in Kirkcaldy in 1723, but invented in US academe in the late 1940s (Paul Samuelson) through to today. It was an ideological attempt to defend capitalist market economies from the pressures of the competing Soviet experiment in totalitarian centralised planning, which fortunately collapsed after 1989, before the Cold War turned Hot.

Some erroneous ideas die slowly, some at a glacier-like pace. The ‘invisible hand’ and ‘greed is good’ fantasies are two such erroneous ideas.

Lost Legacy welcomes even the smallest steps away from the largely Chicago Adam Smith.

"Moral Magnanimity and Moral Markets": a naive dilemma?

Dwight R. Lee, is professor of economics at Southern Methodist University, has posted (19 July) in the Moral Liberal (HERE):

“The Economics of Caring and Sharing
Free Enterprise Zone” (from The Freeman)

“Market morality can be achieved, according to Adam Smith in The Theory of Moral Sentiments, “by sitting still and doing nothing.” And while markets reward kindness and caring for those with whom we have personal exchanges, the vast majority of the exchanges we benefit from are impersonal; we neither know nor meaningfully care for those on the other side of the exchange.

Comment

Actually, Smith applied this statement about “by sitting still and doing nothing.” to meeting the virtue of Justice.
Similarly, relations within our immediate circle of family and close friends tend to be most personal and close, and then successively diminishing as the people we transact with are further from our immediate circle.
Finally, we most certainly have to be concerned with those we transact with in market exchanges – see WN: I.ii.2: p27: ‘we address ourselves, not to their humanity. But to their self-love ,and never talk to them of our necessities but of their advantages’.

Disregarding (i.e., not caring) about those we directly transact with leads to poorer or no bargains. The anonymity begins beyond the immediate partner transactions – we care less about them because we do not know, nor need to know, of them – and so on along supply and demand chains beyond those with whom we directly transact, which is a creditable, as well as necessary condition, for complex transactions amidst modern opulence (and was true in Smith’s day too).

Dwight R. Lee:
Since these impersonal exchanges create enormous benefits from outcomes that emerge without conscious direction, people seldom give much thought to those benefits or the market morality on which they depend. Of course people do think about markets occasionally, but when they do it is seldom with appreciation for the benefits they are receiving. More often than not people think about markets when they are being inconvenienced by the market discipline—the requirements “imposed” on us, for example, in return for income—that makes their benefits possible. Few of us connect such discipline to the far greater benefits we receive as a consequence, particularly when we see others who appear to be reaping great rewards from the very discipline that is apparently making us so much worse off. Under these circumstances it is easy to conclude that we are imposed on unnecessarily by the greed of others. How easy it is to also believe there is something immoral with an economic system that not only tolerates greed but also rewards it.

Comment
It is forgetful of the history of what “worse off‘ meant compared to the societies our predecessors lived in for many millennia before the ‘Age of Commerce’ that Smith analysed that makes it too easy to write about today’s economic system “that is apparently making us so much worse off.’ Compared to what – Somalia, rural China, India, Brazil, North Korea?
Moreover, since when was “an economic system that not only tolerates greed but also rewards it” something new and unprecedented in the history of the human societies, right up to now? The vast majority of the history has often had no choice but to ‘tolerate’ the vile rulers of mankind since long before ‘market morality’ was introduced.

Dwight R. Lee:
“When economists make the case for what they see as the most impressive feature of markets, they typically do so with the aid of Adam Smith in a way that reinforces the view that markets at best lack morality. Smith understood and appreciated magnanimous morality, as any reader of The Theory of Moral Sentiments, his first book, knows. But this would not be known to someone who knew only Smith’s “invisible hand” argument for markets in The Wealth of Nations'.

Comment
Given that “someone who knew only Smith’s “invisible hand” argument for markets in The Wealth of Nations” is living under an illusion, cruelly spread by modern economists, who saw this myth as the ‘advantage’ of capitalism over socialism during the Cold War decades (Samuelson, 1948, et al) and, ironically, by Marxists (Oscar Lange, 1946) as a convenient though false criticism of markets. The myths of the ‘invisible hand of the market”, which Adam Smith never articulated in Wealth Of Nations, nor in Moral Sentiments”, because, as we show endlessly on Lost Legacy, Smith had no such “argument”. It was “invented’ and popularized from-mid 20th century, but not in 1759, nor in 1776.

Dwight R. Lee:
“The advantage of markets, according to Smith, is that by pursuing their own interests in the marketplace, people unintentionally do more to promote the public interest (the interest of no one in particular) than if it had been their intention to do so. [GK: Agreed] This argument ignores every requirement for magnanimous morality, and the way economists phrase the argument makes it easy for people to conclude erroneously that the argument for the market rules out the more personal caring and sharing in which our personal relationships are rooted.”

Comment
Only if Adam Smith’s notion of “self-interest” elides into “selfishness”, which he consistently condemned as “licentious” and “wholly pernicious” referring to Bernard Mandeville, 1724i, n Moral Sentiments (TMS IV.ii.4.6: 308, etc.,) and popularized by Geko’s script writer in “Wall Street” and numerous modern economists and media people almost everyday.

Dwight R. Lee:
“Calls for a more moral marketplace — sometimes referred to as capitalism with a human face—are invariably motivated by the hope of substituting the instinctive morality of the small group for the morality of impersonal markets. …

… The primary advantage of markets is that they provide each of us with the information and motivation to share with literally millions of people, without caring for them.

Comment
Apart from the naïve reliance on “small group morality” of early hunter-gather societies as a model for the future, Professor Lee should add to the moral balance sheet the anthropological data of the death rates inside those small groups and with their neighbours was higher by far than that of what we regard as the very violent wars and urban murder rates experienced in the 20th century among males, not to mention the incidence rape and forced cohabitation among captured women in the very violent ‘wars’ of “small groups. There is no reason to believe that the 21st century (so far) has managed to approach the comparison death rates of the ‘small group’ societies of all previous millennia before capitalism.

Incidentally, these early societies were truly anonymous in every sense in their lack of knowledge or acquaintance of distant neighbouring other ‘small – even large – groups’, living hundreds of miles away across a continent, and were completely ignorant of other “anonymous” groups in distant continents. For example, when those small tribes left Africa and some walked over the generations to what we call Australia, they became ‘unknown’ and truly ‘anonymous’ years until Dutch and Chinese explorers found them for over 60,000 years later.

Today, their descendant children can see on television all the affairs of the otherwise “anonymous” children of those their ancestors left behind.

A Thinker Isn't Thinking Before Speaking

Ed Kaitz writes in American Thinker (HERE): a general attack on President Obama’s policies of which I have no comment, as I avoid commenting on the politics of countries other than the one I vote in (i.e., Scotland). However, I am always interested in the views of people anywhere in the world on Adam Smith’s writings, which were written in Scotland.

‘Obama’s Lip Service to Adam Smith’

‘Adam Smith's central insight remains true today: there is no greater generator of wealth and innovation than a system of free enterprise that unleashes the full potential of individual men and women.’

… In his 1759 publication Theory of Moral Sentiments Adam Smith -- like James Madison a few decades later -- noted that "mere justice is, upon most occasions, but a negative virtue, and only hinders us from hurting our neighbor." Smith was well aware of the twin dangers to the individual of allowing government to break free of the essential constraints built into the negative liberty tradition. What exactly are those dangers?

… First -- on the economic side of the coin -- Smith argued in his 1776 masterpiece Wealth of Nations that "the species of domestic industry [an individual's] capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawmaker can do for him." In other words, rather than Mr. Obama's "national commitments" and "investments" Smith understood that free individual choice at the local level was the real "engine of industry.’

… Smith was at pains to point out that politicians who attempted to instruct individuals on "how to employ their capitals" would be assuming an authority that could not "safely be trusted" and "which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it . . ."

…Second -- on the moral side of the coin -- Smith argued that since genuine human benevolence, charity, and altruism had to be grounded in free will then "even the most ordinary degree of kindness and beneficence . . . cannot be extorted by force." In other words, when politicians speak of "what the federal government must do on your behalf" they are merely using coercion to destroy what makes us moral beings.

Comment
Always be careful of making generalized conclusions about the direct relevance of what Adam Smith said in regard to your own modern policy conclusions. This applies with particular force to Ed Kaitz’s piece in the American Thinker, of which publication and its regular readers I know nothing about.

Take the first paragraph: ‘no greater generator of wealth and innovation than a system of free enterprise’. As a first-level summary generalization this statement is true, but Smith in Wealth Of Nations warned the French Physiocrats of taking this too far (as those with political agendas today often do): Dr Quesnay and some Physiocrats demanded that the ‘perfect system of natural liberty’was necessary for a nation to prosper’ and offered the historical observation (which Ed Kaitz, and others, who wrongly equate Smith with absolute laissez-faire, would do well to ponder) that:

‘If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation that could ever have prospered’ [WN IV.IX: 304 – McCulloch edition, 1863 – apologies, I am in France and I do not have the Oxford University, 1976 edition, with me; look up ‘Dr Quesnay’ in the Index.]

In short, perfection is unlikely, as well as unnecessary, in the real world.

Also, Smith’s attributed reputation among a large section of US public opinion for being an advocate (an ‘Apostle’ no less) is much exaggerated. He never used the words ‘laissez-faire’, though he was familiar with its French use, and much of what he wrote about practical policy shows he was far from an overly zealous advocate of laissez-faire. He wasn’t against all public intervention on some sort of principle; he opposed Mercantile-sponsored State intervention on behalf of those ‘merchants and manufacturers’ who lobbied parliament for protection from competition among each other and their customers.

Indeed, the merchant who is credited with calling for ‘laissesz-faire’, asked for it for himself and fellow merchants, not for his customers, as did those 19th-century mill and mine owners who lobbied for ‘laissez-faire’ against parliamentary laws limiting hours of work per day and against atrocious working condition for women and children. When today’s lobbyists on behalf of major corporations call for ‘laissez-faire’ they should be treated with suspicion (they also support tariff protection too).

Take the second paragraph: ‘mere justice is, upon most occasions, but a negative virtue, and only hinders us from hurting our neighbor’, which is a perfectly sensible and consistent statement in Moral Sentiments (1759).

It is not clear what point Ed Kaitz is making here, apart from seeming to limit the significance of Smith’s teaching on justice as a virtue in Moral Sentiments. Other virtues (propriety, prudence, approbation, gratitude, beneficence, duty, benevolence, etc.,) are positive and the moral individual practices them at all times, and their absence is regretted, but non-practitioners are not exposed to punishment (but they are the disapproval of their 'impartial spectators'), whereas justice is negative because the individual practices it merely by not harming others – he or she does not have to do anything positive to practice it – but is actively punished by the system of justice for its breaches. Just practising justice by not harming others, leaves the individual only partly a moral being if he or she does not practice the positive moral values too. A moral person is an accountable person.

Of course, today justice has a much wider application, including re-distributive actions funded by taxpayers, enforced by the government (in economics this is because of the 'free rider' problem). A country that has no view on the virtues of ‘crossing the road’ to help a person in distress (the Biblical parable of the 'good Samaritan') , or ignoring the plight of the very poor (the Sermon on the Mount), is to fail to practice modern ideas of justice.

In the third paragraph, Ed Kaitz, in the part quotation of ‘every individual, it is evident, can, in his local situation, judge much better than any statesman or lawmaker can do for him’ comes from the (in)famous paragraph introducing the metaphor of ‘an invisible hand’ (the most widely misunderstood paragraph in all of Adam Smith’s writings; WN IV.ii.1-9: 452-56; and see Lost Legacy passim).

Smith was contrasting the positive effects of individuals, in the case some, but not all traders, who were led by their insecurity to avoid the extra risks of foreign trade (the actual object of the IH metaphor), which unintentionally added to ‘domestick revenue and employment’, which increased, what we call today, domestic gross national product (the whole is always at least the sum of its parts). He suggested this process was more successful than what could be achieved by the State in trying to bring this outcome about, a not unreasonable observation, given what Mercantile governments failed to achieve in the 16th-18th centuries, and what we can observe them failing to achieve in modern times.

However, be careful here. On the wider issue, there are clear benefits from foreign trade that raises the domestic quality of life. Smith contested the mercantile view that only exports were valuable and imports were losses. (see Book IV of Wealth Of Nations).

The last paragraph contains a somewhat misleading inference: ‘when politicians speak of "what the federal government must do on your behalf" they are merely using coercion to destroy what makes us moral beings’.

This is not what Smith argued. He was emphatic: the positive virtues cannot be enforced, whether by governments, churches, or vigilantes (of left or right, religious or secular). You cannot force people to be prudent, and well mannered, and so on, and punish them for disobeying such edicts. Indeed, harassing people for breaches of the positive virtues is a breach of the negative virtue of justice, and if justice is beached by local coercion (chasing out of town, burning their houses, shooting at them, etc., for not attending the local church, of being a different skin colour, etc., it would require the legal coercion of the State to prevent such conduct, and punish offenders).

This sort of State intervention does not ‘destroy what makes us moral beings’. Ed Kaitz is not thinking when he writes such ideas in The American Thinker! Adam Smith never wrote anything remotely akin to such thinking.

I suggest Ed sticks to Smith’s actual ‘profound Scottish wisdom’ and not to his questionable version of it as seen in the above extracts.

"Hard Wired" and "Innate"?

Yale University economist, Robert Shiller is quoted by Larry Willmore on Thought du Jour Blog (HERE)

“Robert Shiller on Adam Smith”

“Shiller sees that sometimes people are completely selfish, and that’s the problem for any economic theory – how to make a society work when people are completely, unremittingly selfish.

But he also notes something else: he doesn’t use the word ‘empathy’, because ‘empathy’ hadn’t been defined yet. But it’s a very important observation about human behaviour, which is that we are wired to feel each other’s emotions and to have a theory of other people’s minds (not that he would have used the words ‘wired’ or ‘theory of mind’ either)….

… Smith also talks about a selfish passion, which is a desire for praise. He argues that people instinctively desire praise, but that, as they mature, this feeling develops into a desire for praiseworthiness. …. He uses that to show that what people really want is to be deservedly praised. And that turn of mind, which develops as people mature, is what makes us into people with integrity. ….”.

Comment
My problem with this fairly typical modern presentation Smith on moral behaviour is its use of the “hard wired” metaphor, which alters Adam Smith’s meaning and implies that Smith was closer to Frances Hutcheson’s theory of “innate” moral qualities, which is quite different from Smith’s theoretical contributions in Moral Sentiments.

Shiller seems to suggest that the problem is: “how to make a society work when people are completely, unremittingly selfish”. But they are not so and Shiller seems to agree when he writes: “sometimes people are completely selfish”.

If selfishness is “sometimes” expressed as a behaviour, but not always, how does it stop “society” working? And what happened to moral behaviour being “hardwired”, which metaphor implies it is “built-in” and not “loaded” separately?

Very young children might have a habit of being selfish as every parent (and grandparent) knows. If this is not corrected to some degree (or at all), what Smith called the “great school of self-command” (an idea with stoic roots) ‘kicks-in (to use an appropriate metaphor, so to speak), especially in the school playground.

Indeed, Smith elaborates later in Moral Sentiments asserting that society acts as a “mirror” (another metaphor)of which behaviours are acceptable, including in the family, relatives, closer friends, and others more distant. Those few kept away from society by events, are unaware of unsocial behaviour and have to learn it from scratch.

So what has Smith’s Moral Sentiments got to do with ‘sentiments’ being “hard-wired” (Shiller) or “innate” (Hutcheson)?

What Is The Professor Teaching His Students About Adam Smith?

‘Jberg’ (?), a professor of political science, writes for the Politics at Suffolk University web site (‘a Political commentary from a political science professor at Suffolk’ (HERE):


“Where Adam Smith Was Wrong” (in the “Economic policy & US politics & class struggle”}

“Smith pointed that in an ideal market transaction, both sides are made better off by the result. That’s a tautology - without coercion, you wouldn’t enter into a transaction unless it would make you better off in some way. Thus, in a society where everything is done by ideal market transactions, everyone should become better off continually, day by day, with the sole (but important) exception of market failure. The latter occurs when you want to make an exchange, but can’t find anyone willing to make that exchange with you.”

Comment
Adam Smith wrote some of the earliest thinking on the practice of exchange behaviour (which is fundamental to all of Smith’s Works) in particular in Wealth Of Nations in relation to bargaining. His analysis of the bargaining relationship still stands today (though not always recognised).

In the bargain, one party makes offers to the other: "Give me this which I want, and you shall have this which you want” (WN, chapter 2, p 26-7). It was on this basis that Smith regarded exchange by bargaining a positive force, compared to compulsion and slavery, of which there was plenty in evidence in 18th-century Britain.

‘jberg’ (hereafter, ‘The Professor’) drains Smith’s rich ideas of their content. There is no evidence that ‘The Professor’ has read Adam Smith (and we should note, not for the first, or last, time on Lost Legacy, that modern economists, including Milton Friedman, are not the most reliable guide sto Adam Smith’s Works).

“So if the market makes everyone better off, it follows that government intervention makes someone worse off, right? This, too, is a tautology. The essence of government is force, and you wouldn’t need force (except for basic security functions, i.e. preventing theft) unless someone did not want to do what is required.”

Comment
This was never an absolute assertion by Smith. True, he had plenty of criticism of the practice of governments in the economic management of the Mercantile society of his time (and earlier) but he had clear ideas on the need for, and the appropriate roles (note the plural) of government.

He was not so naïve as to assert ‘that [the] market makes everyone better off, nor, for the record, that ‘government intervention makes someone worse off’. A monopolist faced with competition loses sales. The Professor’s argument is like the half-serious banter found in a pub. Smith saw many positive roles for government (see the details spread throughout Wealth Of Nations – I’ve posted them on Lost Legacy more than once).

The notion that Smith somewhere said that markets always produced positive results is an assertion associated with post-War modern economists under mathematical theories of General Equilibrium by Arrow and Debreau, and popularised by Paul Samuelson, wrapped around the invention of the myth of ‘an invisible hand’.

“The problem is, Smith’s argument (like any argument) is derived from some assumptions, several of which are incorrect: the assumption of uncoerced exchange, the assumption of basic morality, and the assumption of the commensurability of values. Each of these is fundamentally wrong; let me explain!”

Comment
If exchange is ‘coerced’ it is no longer exchange, it is one party deciding the terms of the exchange instead of both parties.

Smith’s Moral Sentiments is far richer that to impute that everybody behaves with “basic morality” at all times and towards everyone else (has The Professor read Smith’s Moral Sentiments?); and “the commensurability of values”, which is unrecognizable to me as a Smithian idea (I am not sure what The Professor means by his assertion).

“Coerced exchanges. The essence of capitalism is not the market, but the wage relationship. The capitalist is different from the feudal lord or the slaveowner because he or she (or more likely it, since the capitalist is likely to be a corporation) buys labor for a wage rather than exchanging it for the right to use land or compelling it by brute force.”

Comment
Adam Smith did not write about “capitalism” – he neither used the word and nor did anybody else until 1854 in English literature – William Makepeace Thackeray, in his novel, The Newcomes. Moreover, Smith’s views of the ‘joint-stock company structure, a predecessor of 19th-century corporation, were highly critical (Wealth Of Nations, Book V).

“Capitalism was only able to get going because a lot of people who had lived on the land were driven off it by the enclosure movement. Once they had no other way to support themselves, they became available as full-time wage laborers.”

Comment
The Professor now steps into economic history without watching where he is treading. Enclosures were not the cause of the drift of the landless from the land – though widespread as a belief by the uninformed. They were only one factor.

Agriculture was inefficient; it was riddled with the deadweight of primogeniture and entails, in which the wretched serfs, retainers and slaves did not live in ‘a land of milk and honey’, dancing merrily round May Poles. The professor paints a naïve picture of labourers’ lives.

The drift to the villages and towns began centuries earlier (even in Roman times), both of skilled artisans servicing several areas, and of ‘runaways’ from Feudal oppression.

The great 19th-century growth of town populations was also part of migration (from Ireland and Scotland) into England, and of Europe into the new USA, and was sustained mainly by population growth from rising real incomes and survival rates of more children of the mass of labourers.

“If you have no other way to live you have to get a job, whether you think the wages are enough or not. Workers can try to force up the wage level through collective bargaining - but if they are in the job market as individuals, it is not a free exchange; one side, the employer, can dictate the terms.”

Comment
The reality was not one of free bargaining. Laws against combinations of labour operated ruthlessly, though not against employers. There were also long-standing laws of Settlement, Apprentices Statutes, Wages set by Magistrates,
Town Guilds and their monopolies, ensuring that “free exchange” did not exist. However, despite all this (and more) real wages began to grow post- 1800 and continued since.

Common labourers’ incomes rose above biological subsistence for the first time in all history (blips like the Black Death rise in real wages excepting) and the Malthusian trap in what became the Capitalist West was sprung. The rest of the world is now catching up and those countries adopting some form of capitalism are catching up faster; conversely, those that are not doing so (deliberately or institutionally), are not.

These facts challenge The Professor’s theories of the “class struggle”.

“Failure of moral limits. Adam Smith thought that abuses of the market would be prevented by the basic humanity of morality. Of course he was right to think that people are moral beings, and the vast majority of us try to do what is right, at least as we see it. Unfortunately, however, “the vast majority” is not enough. Immorality gives a competitive advantage, so the people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top. One very important reason we need government is to keep immorality from prevailing.

Comment

Adam Smith thought “abuses of the market would be prevented by the basic humanity of morality.”
Not quite: where ‘abuses’ were politically sanctioned (mercantile political economy, the subject of Book IV of Wealth Of Nations - what he called his “very violent attack” on the prevailing “system”) and voted by legislators in Britain since the 16th century; they were the proper business of government to repeal. Basic morality is a thin reed to deal with “abuses of the market”. The Professor of “political science” has got it wrong again.

The Professor writes that “people whose behavior is not limited by moral principles - in other words, those willing to lie, cheat, and steal - tend to rise to the top.”

As a generalization, it is probably true, though this progression is not confined to corporate swindlers – it also applies to leaders and apparatchiks of revolutionary parties, communist, fascist/Nazis, Mullahs, military coups run by generals (Left or Right), corrupt trade union bosses, environmental extremists (they get more extreme), and theological fanatics of all religions. Smith’s answer to extremism was education and strict application of the laws of justice.

“Money can’t buy happiness. Finally, it’s simply not true that values are commensurable (i.e., that they can be measured by a common unit, which we call “money.”)

Comment
I am still not sure what The Professor means by this. He may not be aware that Smith had clear views of money as a medium of exchange. He did not consider money was wealth. He firmly argued that wealth was the annual output of ‘necessaries, conveniences, and amusements of life’ (Wealth Of Nations).

The Professor’s students deserve to know all this, but they may wait in vain for him to introduce his students to the Adam Smith, who was born in Kirkcaldy, Scotland in 1723, instead of the fantasy Adam Smith invented in Suffolk in the 21st century.

New Smithian Classic Published

I have just received a newly published copy of the Theory of Moral Sentiments by Adam Smith, 6th edition, 1990.

What you may ask is so remarkable about that?

This edition is published by Penguin Classics ($17 US and £10.99 UK) well within most student budgets. It is introduced by Amartya Sen in a typically erudite and relevant manner (for 'old hands' and beginners) and it edited by Ryan Hanley, as good as it gets in a modern Smithian scholar, who know Moral Sentiments inside-out and back-to-front.

I've heard Ryan twice now at seminars on Moral Sentiments and came away from both both educated and astonished at his insight (his End Note are a treasure chest in their own right.

Whoever thought of giving cameo/bio notes on everybody mentioned in Smith's text is a publishing genius. They bring the text to life.

I recommend readers to purchase a copy - I have absolutely no personal interest to declare! - because it lifts Smithian scholarship, and old and new readers, to a new level.

The Penguin edition 2-volume of Wealth Of Nations, edited and introduced by Andrew Skinner is also exceptionally good quality.

More on Smith and Market Morals

From Beezer Notes HERE

[Originally published and written by by Maxine Udall (“girl economist”) HERE


“The Market For Morals"

“Markets are places of reciprocity, of fair exchange, of a sort of equalizing justice. Without money or markets, there would be “no exchange or association.” The demand for services that are mutually beneficial is part of what holds society together. In Aristotle’s time, markets drew people out of their homes and into the marketplace to interact with their neighbors and townsmen and women; to observe the behavior of merchants over time; to develop sympathy for the individuals that they traded with; and to become invested in the welfare of their community. Markets were the warp upon which was woven the social fabric that binds us into community.

In Adam Smith’s time, markets had expanded beyond the Agora and the village square, but the social by-products of market transactions were not much different. The oft-repeated transactions of market exchange and trade provided opportunities for the development of individual virtues such as temperance and prudence as well as the social glue of mutual sympathy, trust, loyalty, and justice. Unfortunately, Smith’s thoughts (in Theory of Moral Sentiments) on the moral glue that binds us have been largely ignored, while a very few passages from Smith’s Inquiry into the Nature and Causes of the Wealth of Nations have become the scaffolding in support of extremely dysfunctional markets and the rhetoric that promotes them.

Here’s Smith saying something similar, but more nuanced than Aristotle:

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 for 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.” [WN I.ii.26-7]

Of course, Smith’s conceptualization of “self-love” was much broader than the narrow “self-interest” that is often confused with it. Self-love hearkens back to Smith’s Impartial Spectator in TMS, the moral arbiter within:

“It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct…who 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. It is this impartial spectator . . . who shows us the propriety of generosity and the deformity of injustice; the propriety of reining the greatest interests of our own, for the yet greater interests of others . . . in order to obtain the greatest benefit to ourselves. It is not the love of our neighbor, 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, the love of what is honorable and noble, the grandeur, and dignity, and superiority of our own characters.”

[TMS III.3.4: 137: from the Man of Humanity and the Earthquake in China]

Comment
Read the whole article - follow either link -it's well worth your time to read a concise exposition of the morality embedded in Smith's moral theory of markets and a timely reminder that there was much more to Adam Smith's analysis of how markets work most effectively in a moral environment.

Maxine Udall's Blog is well worth your regular visits (HERE)