Adam Smith was Innocent!

Dr Carlo Scodanibbio & Ing Joseph Micallef, post (4 April) on Di-Ve HERE

“Lean management: Culture change for less operational cost, improved value”

“The second industrial revolution started silently over two decades ago, but Malta still seems attached to the principles, strategies and philosophy of the first one, brought about by Adam Smith and Frederick Taylor a long time ago. This is a considerable problem, because the principles of the first industrial revolution are rather dated, to say the least.”

Comment
It is a gross exaggeration to say that the first industrial revolution was “brought about by Adam Smith and Frederick Taylor.”

Apart from Adam Smith (1723-90) living in the 18th century and Frederick Taylor (1856-1920) in the 19th-20th centuries, the first industrial revolution appears to have been purely coincidental to anything that Adam Smith wrote about the already existing forms of the commercial society he observed and its main affects were over by the time that Taylor was investigating “scientific management”. Adam Smith was criticised in the 20th century for not noticing - even ignoring - the technological changes going on around him (see Kennedy, Adam Smith's Lost Legacy, Palgrave, 2005, Chapter 29, especially on "Kindleberger versus Hartwell', pages 128-31).

Even the popular term of the industrial revolution began to be circulated in Britain, Germany, and France long after Smith and long before Frederick Taylor (see Anna Bezanson, “The Early Use of the Term Industrial Revolution”, Quarterly Journal of Economics, Notes and Memoranda, vol. 36, no 2, Feb, pp 343-349 – last accessed 4/4/12: http://www.jstor.org/stable/1883486?seq=1).

There is a more substantive point raised by Scodanibbio and Micallef’s paper: to what extent do underlying social processes owe their origins to named or unnamed philosophers and engineers? Deep social changes are seldom, if ever, the result of specific individuals who write about them.

Adam Smith did not bring about any ”industrial revolution”. The events that made up the industrial revolution were caused by deep underlying consequences of the division of labour that had lasted for many millennia (and nor was he the first philosopher to write about it). Nor did Smith “invent or cause “capitalism”, and neither was “capitalism”, however defined, in any way the result of his book “Wealth Of Nations”; both of which silly attributions in modern media appear regularly. The word 'capitalism' was invented in English in (Thackeray's novel 'The Newcomes", 1854)

Adam Smith observed and also studied history. He was not an advocate of the “human design” of utopia systems and held “men of system” in something just short of contempt for imagining that their new schemes for society would be implemented and would solve any problems faced by humanity (see Moral Sentiments, Part VI, Section 2, chapter 2, paragraph 17: pages 233-4).

The attribution of the 'division of labour', the 'first industrial revolution'. or 'capitalism' to Adam Smith is an avoidable error. Read Adam Smith; don't just third-hand quote reports of it.

“The triumph of global capitalism”

Jacob Lundberg (17 February) HERE

“The rise of global capitalism since 1980 has been the central factor in the massive rise in global quality of life. In this article, Jacob Lundberg explains why more liberalized global markets have meant richer and freer people.”

Follow the link to the article in the Adam Smith Society’s (London) ‘Pin Factory Blog’ HERE This is the best antidote to the daily – nay, hourly – pessimism put out by “activists” that the Earth is going to hell on every dimension. It isn’t and won’t. Unless, of course, the obsessive pessimists manage to convince enough legislators to adopt their proclaimed remedies and they undo what progress has been made and, in the absence of resistance to activism, continues to make. Despite the congenital pessimists, the world has already made great strides in the right direction, well illustrated by the facts summarized on Jacob Lundberg’s article.

Adam Smith wrote at a time when many ideas were exchanged on what was happening in the world in his day and we can trace his nascent ideas of the prize awaiting any country that learned the lessons of history and moved closer to the philosophical ideas of ‘natural liberty’ and away from mercantile political economy. The ideas of Adam Smith should be discussed widely in the Academy because they deserve a wider audience, but only if participants cut through so much of the nonsense written about Adam Smith by all sides of the political spectrum, including “Left’ activists and ‘Right’ ideologues, and, sadly those senior academics who should know much better having read (supposedly) Adam Smith’s Works.

Smith wrote just before debates about income distribution began to shift from passive acceptance of the existing stations of people towards an interest in legislating in favour of some level of redistribution. In the 19th century these new ideas changed the millennia-long restrictive view of ‘distributive justice’ towards the newer ideas of people’s ‘rights’ to direct access to minimum levels of subsistence. This formed a central plank in what became the social-democratic platform, linked with pressure for a wider electoral franchise, and eventually in 20th-century notions of a Welfare State.

Meanwhile, from mid-19th century, Marxist theories of communist states spread, culminating in the 20th-century experiments in socialism in Russia, Eastern Europe, and China. Advocates of one-party state socialism believed their experiments would prove the superiority of state socialism over enfranchised capitalism. Well, events showed the fallacy of socialist superiority over market forms of sate-capitalism. The poor in communist states remained poor and disenfranchised.

Adam Smith took a radical stance towards the condition of the rural and urban poor and he articulated the view that the continuing division, and sub-division, of labour with the ever extending complexity of markets, would raise living standards to at least unprecedented subsistence levels in the first instance and, then through economic growth, make available to labouring people and their families, access to the ‘conveniences’ of life. This process would continue argued Smith provided that erroneous political economy could be curbed and replaced with markets where possible and state investment where necessary. This required a resolute policy in favour of market competition and an end to Elizabethan mercantile privileges favoured by a merchant order of men whose interests conflicted with the interests of consumers.

A similar reform to the habits of the rural landowners was called for, and Smith recommended an end to primogenitures and entails. The relative absence of these legal impediments to modernization in North America, showed what might be achieved in the consequential rapid rise in labourer’s wages and in the growth of agricultural production, and, therefore, consumption among labourer’s and the middle-class. The great diversion and entrenchment of landed interests from the slave traded held back North America from benefitting from the full affects of these desirable changes.

Nevertheless, in contrast to the Iberian dominance of Central and South America that held back this vast southern European continent, North America, even with its slave-economy, showed the possibilities of rapid economic progress compared to Europe as a whole.

Smith’s relied on the progress of markets towards opulence from their stimulus through applied technological innovation on a scale not seen anywhere before in human history. Those waves of innovation continue to this day, and now spread far afield, led now by North American state capitalism. Smith’s approach to the poverty of the labouring poor was pragmatic, not activist or political. Which arrangements would raise employment and living standards more surely than mere redistribution of some income by localized charity, which at best only ameliorated poverty (welcome as that was)? His answer to problems of mindless sub-division of labour was not to try to stop complex supply chains in markets, nor the sub-division of labour (a futile and reactionary quest), but to persuade legislators to part-fund the education of children from age 6 years onwards in literacy and numeracy (WN V.i.f: 758-88) to make them suitable for working lives and careers in the innovation-led sectors. Fortunately the Luddites lost.

He favoured higher proportional rates of taxation on the rich because they could afford them much easier than the poor, assuming government expenditures were requuired. He railed against useless wars in Europe, in which the poor fought on behalf of the dynastic interests of sovereigns or for futile reasons of ‘jealousy of trade’, a wholly reactionary interest inimical to the general population of consumers. The very last sentence in Wealth Of Nations advises governments of Great Britain to restrain their expenditures ‘in time of war ‘ and in ‘supporting any part of their civil or military establishments in times of peace’ by accommodating ‘her future views and designs to the real mediocrity of her circumstances’ (WN V.iii.92: 947). Instead, of course, governments, having learned nothing from losing the American war of independence, embarked onover a century-and-a-half of Empire building, with military establishments and world wars to match.

Yet despite this waste, the spread of opulence continued unabated at unprecedented historical rates of growth of ‘employment and revenue’ benefitting the formerly poorer segments of the population, well beyond ‘necessaries’ and deep into ‘conveniences’ on an unimaginable scale. Lundberg shows the consequence of these trends for the poorest in the so-called Third World.

It is a remarkable performance. And the activists claim that market capitalism is a threat to the future! They sit in tents talking among themselves, or join violence in the streets, smashing and burning buildings, as if that is going to put food on any poor person’s table. They make fantasy promises that capitalism is the problem, not the solution.

We’ve seen the socialist and activist alternatives and we have no reason to be impressed.

The Inventor of ‘Capitalism’ is 200 years-old Today

William Makepeace Thackeray, (1811-1863), novelist, was born on 18 July 1811 at Calcutta, the only child of Richmond Thackeray (1781-1815), secretary to the board of revenue in the East India Company at Calcutta, and Anne Becher (1792-1864), second daughter of John Harman Becher, a writer for the East India Company, and his wife, Harriet.

For a full biography see his entry in the Oxford English Dictionary (HERE).

Thackeray wrote The Newcomes and published it in serial form from 1854. In it he ‘chronicles the affairs of a most respectable family' of merchants, bankers, and petty aristocrats. The respectability is primarily one of manners and appearances, and the novel reveals in great detail intense intra-family jealousies, rivalries, fights, and outward politeness’ (OED).

No summary of any of Thackeray’s novels, or the hundreds of his short essays and, usually mocking, vignettes, can capture his unique and insightful style.

As a student, I purchased a secondhand copy of Thackeray’s biting satire, The Book of Snobs, and treasured it for many years. Alas, I cannot find my copy today. In the first-year English class at University, we read Thackeray’s Vanity Fair (what a joy!).

Years later, I picked up another of my second-hand little volumes, The Newcomes, and enjoyed it thoroughly. Coincidentally, I examined the origins of the word ‘capitalism’ in the great, Oxford English Dictionary and found to my double delight, the first use of ‘capitalism’ in English was credited to Thackeray in his novel the Newcomes (1854), where he mentions ‘capitalism’ several times.

As they say the rest is history. ‘Capitalism’ as a word is now ubiquitous, praised by some condemned by others. In the popular press, and sometimes in more serious publications, ‘capitalism’ is (falsely) credited to Adam Smith (who never heard, nor knew, of the word) and back-projected onto manifestations of early commercial societies in late medieval periods and right up to the tail-end of the so-called ‘industrial revolution. Erroneously, it is credited to Karl Marx.

No, it was a modest novelist, with a great sense of the humourous and pompous follies of the men and women in modern societies, who quietly used the word for the first time in English. Though born to East India Company English parents in India, he travelled and lived widely, spoke fluent French and German, visited the United States and had investments in its railroads and the early telegraph companies, knew a fair share of bankers and men of money, and also of a snobbish social slice of the English upper classes and their transatlantic cousins.

Thackeray saw all sides of the new capitalists – and their wives and extended families, and the mother-in-laws of all classes, of whom he had little that was kind to say about them. His stories would make great television and DVDs for a new generation of non-readers of books.

Follow the link and read his OED and DNB entries – perhaps also stretch your mind by reading his essays and novels. If they disappoint you,I am sure that Thackeray cast a character of like-minded preferences to your good self.

Origins of Commercial Society Leading to Capitalism

Eamonn Butler, director of the Adam Smith Institute (London) writes in its Blog HERE:

‘Capitalism from the bottom up’

'I stumbled across Christopher Dyer's book An Age of Transition? (OUP) only What it looks for is the origin of capitalism, if you like. Somehow, between the Middle Ages and the Industrial Revolution, Britain had already become a recognisably modern economy. People were freed from life on the land and were building up capital – ships, factories, plantations. Cities were growing, artisans were multiplying and flourishing – so much so that the old mediaeval guilds petitioned their monarchs for regulations to restrict these 'cowboy' new market entrants. Nothing new, is there?

Most historians, perhaps few of whom understand economics, tend to imagine that the growth of capitalism in Britain came from enlightened 'improver' landowners, turning their land from feudal estates into commercial farms. But Dyer disagrees. Sure, the old social structure of duties and responsibilities faded. Family ties were replacing feudal ones. Markets were springing up. Land was being enclosed and made private. But the big landowners, says Dyer, were far too few – and far too preoccupied with getting well-paid jobs and monopolies from government – to drive these changes. It was people well below them on the social scale who drove them, making the enclosures, converting poor land to pasture, and from there building up larger farmsteads that were far more efficient in production.

So it was the peasants who drove progress, not the toffs. Nothing much new there, either.

Comment
I have offered a couple of comments to Eamonn’s views and to the discussion that followed:

‘How right you are Eamonn. In fact, AdamSmith noted this phenomenon in Wealth Of Nations, 1776, (and his Lectures OnJurisprudence, 1762-3) ) as an aberration from ‘natural’ or ‘expected’ progressfrom agriculture to industry, and went on, typically to analyse it, bearing in mind the significance he placed on the lasting importance in Europe, where development eventually had gone furthest, of the fall of Rome in the 5th century, which destroyed the early burgeoning markets in town and country, and much of the growing city-agricultural living standards for a time. As these recovered in the 15th century they did so, after some centuries of European warlordism, in what eventually became a feudal economy with primogeniture, entails, and dynastic quarrels, in which land was owned by those who could hold it against all comers, the most powerful of them becoming or remaining kings.

The phenomenon of new, mainly skilled trades (including those of literacy, painting, weaving, and fine arts, at one (neglected) level and on the physical level too, in which artisans of all kinds of skilled labour, organisations and management, were of great importance, alongside the growing commerce of towns of varying sizes and locations, is often neglected by historians too.

The classic image of (always ‘downtrodden’) labour in town and country is less than accurate; skilled labourers (supervisors and managers) had a significant role as higher paid than the basic day labourers, right through these ages and, particularly, were significant through and beyond the industrial revolution. That ‘middling class’ raised their per capita incomes beyond the mere ‘necessaries’ of life, to mimicking the levels in ‘conveniences’ of those they served. That Dyer has painted in some of this picture is encouraging. The growth of capitalism was not so dire, compared to life in the countryside, for everybody, except the very rich, as the ‘left’ believe.’

And my response to a discussant:

‘In so far as our question may be directed at me, I suggest you contemplate that commercial society - later capitalism - needs both capitalists and consumers (aka: 'workers') and labour is not homogeneous in the form of the 'downtrodden' labourers, all starving on subsistence wages. The nature of commercial societies, from the start, required strata rising among them. A ship travelling to France, or from Newcastle to London, had its captain and petty officers, apprentices, and leading hands, for example. Similar across new industries (overseers, foremen, skilled and semi-skilled workers on higher wage rates. It was no accident that early 19th century educational institutions (the Edinburgh School of Arts, forerunner of Heriot-Watt University) were set up for young literate and arithmetically numerate men to teach them maths, chemistry, physics, who were moving up the employment ladders of the slowly industrialising economy. Marx was to call them the 'aristocracy of labour' but underestimated their significance.’

To follow any future comments follow the link above.

A Linguist Misses Adam Smith's Point About Man Being A Social Being

George Lakoff, author of The Political Mind, Moral Politics, Don't Think of an Elephant!, Whose Freedom?, and Thinking Points. He is Richard and Rhoda Goldman Distinguished Professor of Cognitive Science and Linguistics at the University of California at Berkeley.

He writes in Huffington Post (HERE):

“What Conservatives Really Want”

“The market itself is seen in this way. The slogan, "Let the market decide" assumes the market itself is The Decider. The market is seen as both natural (since it is assumed that people naturally seek their self-interest) and moral (if everyone seeks their own profit, the profit of all will be maximized by the invisible hand).”

Comment
I am sometimes asked by sceptics of Lost Legacy’s campaign against the modern interpretation/invention of the “invisible hand” – “why is the invisible hand so important? It’s merely an argument over a trivial detail that does not mean all that much”, they tell me. (Let’s face it, it is also a great, though boring, “put down” delivered as only a certain type of scholar can do.)

Well, here is an example of why it is important to me and why is should be important to them. Professor George Lakoff doesn’t believe in the “invisible hand” myth – that’s clear from the context – but he is able to assert that “conservatives” do believe in it, and with some justification – read any modern textbook, or journal article that mentions the ubiquitous “invisible hand” (with the exception of my own – and a very few others).

Professor Lakoff uses this near unanimity among modern economists (conservative, libertarian, Austrian, Hayekian, Public Choice, neo-classical and some heterodox economists (and others apparently, including Chinese communists) to build his case against ‘capitalism’ and its alleged assorted ‘crimes’ against morality, decency, and humanity (follow the link for his full, albeit largely linguistic, thesis).

The invisible hand myth damages economics because it is without merit and it is refutable by the evidence of Smith’s own Works and by the non-evidence of its presence in the real world. Markets, through very visible prices and the reactions of human behaviours to what is visible, fully explains their social power. Economic theorists since the 1870s developed mathematical relationships which do not conform to how humans tend to behave – as the behaviourists have demonstrated - which is more than the mathematicians, marginal utility equilibrium theorists, and the purveyors of Homo Economicus have ever done.

Professor Lakoff misses Adam Smith’s main point, namely that society is not just about individuals – it is always in a social context. Self-interest can only operate between individuals in society. The earliest and decisive propensity common to humans was that of ‘truck, barter, and exchange’, which by definition requires more than one individual.

Society provides the "mirror" (said Smith) from which individuals learn how to behave appropriately to that society (different societies may have different ideas and practices as to what is appropriate). The lonely, self sufficient ego is a figment of the American (and Ayn Rand’s) imagination, not from Adam Smith.

However, this is not the time to provide a compete rebuttal of Professor Lakoff’s wilder shores of his imagination about Adam Smith, his Works and his moral philosophy, or his political economy.

A Thoughtful View From CATO

Gerald O’Driscoll writes in the Wall Street Journal (22 April) “CATO Blasts Mercantilism” and reproduced in part in Right Side News Blog:
HERE

‘Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice. Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

If we had any quibble with this article it would be, first of all, along the lines of the utilization of the term "crony capitalism." It seems to us that another term, historically more precise, would be mercantilism. In America, those who regularly deal in sociopolitical terminology seem determined to substitute their own words for words that already available. We don't understand why this is necessary. Somehow, for instance, America lost sight of what "liberal" meant in Europe; thus to use the term "classical liberal" in America often needs an explanation now…

… Likewise, "crony capitalism" may have more of a meaning in America than Europe, though mercantilism has considerable potency in our opinion. We read this in the Library of Economics and Liberty: "In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state." …
… Indeed, the process of mercantilism advantages some private interests over others. The United States, like Europe, has been moving toward a full-blown mercantilist-style system for some time now. Perhaps the system could be termed neo-mercantilism. It doesn't have all the formal elements of mercantilism (as regards government accrual of gold bullion, etc.) but it certainly has supported a strong relationship between a favored business class and the government itself. …

… The problem with such approaches, of course, (from a purely anarcho-capitalist point of view) is that one needs an "enforcer" to ensure that such concepts are properly adhered to, and almost inevitably one may end up with a regulatory authority once again. It would seem, therefore, based on this article and similar rhetoric - especially from CATO which seems to espouse "reasonable" libertarianism - that there is still, even within American libertarian circles, an impulse to distrust markets themselves, and their inherent disciplinary abilities. We would like to offer up the idea that the Invisible Hand itself is a formidable disciplinary device. Wouldn't a company that consistently misleads customers or investors run itself out of business - regardless of whether it was under an affirmative obligation to exercise a duty of care?’

Comment
G. P. O’Driscoll, jr, is the author/editor, 1979, of Adam Smith and Modern Political Economy, Ames. IA: Iowa State University Press.

This long article (follow the link) is quite refreshing and suggests that some new thinking is underway at the Cato Institute (a libertarian think tank) about the status of modern US capitalism.

I have long argued that mercantile political economy did not disappear after Adam Smith; it continued, after the loss of the British colonies in North America, in the Caribbean, Canada, India, South Africa (later most of Africa), in the North Pacific, and Australia and New Zealand. As Britain’s first empire fell away (George III would not compromise on anything, so he lost everything), its second empire grew in strength until full-blown colonialism was back in force. Coinciding with the growth of the modern state – still small by today’s standards – mercantile interests were back in business, so to speak, of which ‘crony capitalism’ is a very American alliteration.

I am not taken with the idea of the ‘invisible-hand’ as a ‘formidable disciplinary device’. How and with what means would a metaphor (for what?) exercise self-discipline? Asking if a company whether a ‘company that consistently misleads customers or investors run itself out of business - regardless of whether it was under an affirmative obligation to exercise a duty of care, invites my not entirely cynical response of: ‘I doubt very much if it would!

Similarly I have little faith in regulation, which I agree, tends to self-proliferate once embarked upon both from ever inventive amendments to existing processes and unintended extensions of the regulations to fringe and peripheral areas to ‘plug gaps’ and ‘evasions’ in the interests of multiplying head counts among the regulators.

Play The Hand You Are Dealt

David Chan writes The Invisible Hand’s Blog HERE
http://pinchmehard.wordpress.com/2010/04/07/bad-news-for-alberta/

Suzanne Fields writes in the Washington Times HERE

“Toward a new capitalism”

“But the old capitalism, as we knew it, is giving way to a new capitalism, whether we like it or not. "The day has passed when the engine of capitalism, the financial market, will be allowed to operate more or less unimpeded by government," the provocative economist Irwin Stelzer told a lecture audience the other night at the American Enterprise Institute, a Washington think tank. He cautioned that his remarks were a "thought experiment," not a blueprint for analysis of the present economic predicament. He threw out several challenges of the status quo:

"If market capitalism is to survive the assaults of statists and populists, the former far more dangerous than the latter, we need what might be called a neo-orthodoxy - the development of new adaptations of the basic truth taught by great economists from Adam Smith to John Maynard Keynes. From these adaptations might emerge a new capitalism, the latest form of this most resilient of economic systems."

Market capitalism, Mr. Stelzer observes, must temper its "creative destruction" to be "less destructive, even if it means being less creative." One of the most difficult challenges for liberal and conservative alike is to figure out how to weigh the benefits of globalization for consumers against the costs to earners of high wages.

The underlying argument is for conservatives to pick their games carefully and, like good poker players, play the hand they're dealt, not the hand they wish they had. Capitalism can remain resilient. Paradise lost can become paradise regained.”

Comment
Another apocalypse-soon message, this time with a bit of class compared to the usual ravings from people who hear voices in the night and have a perfect master system to solve all problems, with the proviso that 7 billion people join together to implement their wonderful changes to everything.

Mr. Irwin Stelzer is an economists and his broad message has an element of plausibility in it. He calls for ‘Market capitalism’ to ‘temper its "creative destruction" to be "less destructive, even if it means being less creative." The allusion, of course, is to Joseph Shrumpeter’s beautiful expression that characterises capitalism as ‘the perennial gale of creative destruction’, a wholly laudable force that has raised living standards since our predecessors lived in forests. I am not sure how Irwin suggests we arrange to bring about the curbing of the ‘perennial gale’. Which legislature would vote that into law?

Irwin correctly describes the ‘new capitalism’ as ‘the latest form of this most resilient of economic systems’. This can be seen by observing how much capitalism has changed since Smith’s day, though some ancient elements of the old capitalism remain, such as the mercantile spirit which Smith railed against, continue in various forms across the globe. There are also different versions of capitalism in evidence in North America, Europe, Russia and, uniquely, that found in China.

I liked one paragraph in particular (it’s good advice at all times; I say the words italic often enough to my children):

“The underlying argument is for conservatives to pick their games carefully and, like good poker players, play the hand they're dealt, not the hand they wish they had. Capitalism can remain resilient. Paradise lost can become paradise regained.”

The Fallibility of a Word

“Mark” at Larvatus Prodeo writes HERE of “Rebranding Capitalism” to which I posted a comment:

The word ‘capitalism’ was first used in English by William Makepeace Thackeray in 1854 in his novel, The Newcomes, chapter XLIII.

He was talking about the business, mainly financial, affairs of some of his characters. He also used the word “capitalist” several times, though this word was first used in English in the 1790s (in French, capitaliste, was used earlier in the 1760s – I am writing from memory just here).

The word ‘capitalism’ was not used by Adam Smith (he died in 1790), nor by Ricardo (1817), Malthus, Mill (1849), nor, interestingly, by Marx.

Adam Smith referred to his ‘4th Age of Man’ as commerce, the earlier three being “1st, the Age of Hunters; 2dly, the Age of Shepherds; 3dly, the Age of Agriculture” (A. Smith, Lectures on Jurisprudence, p 14, [1762-63] 1978).

Myths and Reality

A Mr Jacob R. Freudenthal of New York writes to the Financial Times HERE

“The iron fist forcing though healthcare reform”

“I am not an economist, but I had always thought that capitalism was supposed to be based oncompetition and freedom of consumer choice. When a politically influential interest group is able to harness the power of the state in order to expand its stranglehold over an industry that is so essential to the health and wellbeing of the entire population, Adam Smith’s invisible hand looks more like an iron fist.”

Comment
A typical ‘popular’ take on the metaphor of the invisible hand used by Adam Smith and by scores of others from classical times, particularly in the 17th-18th centuries, but also right up to modern times (even in a “Tarzan” novel).

I have seen a variation of the “Iron Fist” version in the form of “a middle finger” (I understand this is an allusion to a vulgar “street” sign given out by some incompletely-educated people today).

In this case, it’s about a row over a Health bill going through the US Senate, of which I have no views (I only comment on political issues in the country where I vote – Scotland).

I can comment on the remark about “capitalism was supposed to be based on competition and freedom of consumer choice”. This is a remarkable statement from Mr Jacob R. Freudenthal. On one abstract level he is right, but not in the sense that this view corresponds to any (to my knowledge) modern state-capitalist societies in the 20th-21st centuries. It could even be argued that no such ‘capitalist’ society has ever existed.

Adam Smith wrote a devastating critique of mercantile political economy and it’s state-commercial integration almost from the 16th century onwards.

Think of 18th-century legislation to regulate society, making it less competitive in practice – Statute of Apprentices; Settlement Acts; Navigation Acts; Corporate and Guilds Acts; Protection and Prohibitions; Primogeniture and Entails laws; Chartered Monopolies and Tariff policies.

Smith’s critique was not against all state legislation or even in favour of minimal legislation (another myth dince the 19th century); it was against legislators and those who influenced them who passed laws that perverted the effects of competition.

The point is that much of what was eventually repealed was replaced by new forms of anti-competitive measures. The USA is hardly a bastion of free trade, as can be said of most others. The ultimate case is that of agriculture, a standing disgrace that rich countries discriminate against some poor countries potential exports.

In all of this, of course, the metaphor (and myth) of “an invisible hand” is a diversion. It has no relevance to the issue of health supply. That’s down to politics, finance, and the electoral system.

Art Carden on Why Capitalism is Unpopular

Art Carden writes in The Market Oracle (HERE):

His article, “Why Is Capitalism So Unpopular?” [abridged drastically below – follow the link] is a tour de force, an imaginative explanation that fits the question with a literate, convincing, and an honest answer. Read the sample and then follow the link.

“Henry Hazlitt once said that good ideas have to be relearned every generation. Among the intellectuals of our time, capitalism is wildly unpopular. This in spite of the fact that it is the only social system that has permitted prosperity and flourishing.

I think there may be a more straightforward explanation that plays a role in their dismissal of capitalism. To a "man of system," to borrow Adam Smith's terminology, capitalism just isn't that exciting. Participants in the market economy are wholly beholden to consumer wants. The academics envision a grand world, where Great Men fight Great Wars, periodically inventing Great Things or developing Great Ideas. Instead, the market provides us with incremental processes, which expend enormous piles of resources, in a quest to make better Triscuits. It is hardly the stuff of high drama, to say nothing of Great History.

The idea that great statesmen are not needed — to say nothing about being wanted — can no doubt be galling to many who decry capitalism for its excesses. For the people who derive their self-worth from being paternalistic, this is a sorry state of affairs indeed.

According to the do-gooders whom Adam Smith called "men of system," the average person is like a piece on a chessboard, to be arranged at the whim of a supervirtuous planner. The planner, who ignores the fact that each of the pieces has (as Smith put it) its own "principles of motion," does his best to orchestrate a game according to his own rules. Dissenters are not tolerated.

Yet people are not chess pieces, to be moved around at will. They are living, breathing, acting, thinking, rational beings with rights and dignity. Respect for their humanity rules out interventions by do-gooders, no matter what their intentions. The result of denying people their fundamental freedoms can be terrible, as the horrors of humanity's 20th-century experiments with collectivism have shown.

Comment
There is much more in Art Carden’s article. I strongly recommend that you read it in full.

Market economies work better than their alternatives and better, in my view than so-called “free markets” where businesses are aided by friends (and, alas, sometimes by clients) in public office. Shutting down state departments of trade and industry, and all lobbying organizations, followed by barring all lobbyists, would be a start towards freer markets.

Of course there is an essential role for government where necessary; defence, justice, public works and public institutions, education and health funding (not always by public provision, but always by voucher schemes), necessary regulation aligned with justice and the separation of powers, and the promotion and defence of personal liberty.

Art Carden’s article deserves the Lost Legacy September Prize, with bar and oak leaf clusters. I for one am truly impressed.

Was 'Capitalism' Designed by Adam Smith?

In a debate, so far conducted as an exchange of comments, I have made a longer comment than the system allows, so I have brought it a a post below:

I refer to my post and subsequent comments 'Beyond the Facts' with Antony North, below'

'This was not how capitalism was meant to be, originally devised by Adam Smith as a philosophy to go alongside thrift.'

My problem with this sentence is the part: “how capitalism was meant to be”.

Societies are not ‘meant to be’ (if so, who by? How does the ‘meant to be’ work?, etc.).

Societies are not ‘designed’ by any one person. All attempts at utopias fail; good intentions account for nothing; nobody
‘designed’ any previous society.

Gatherers engaged in certain behaviours which they inherited from their primate ancestors (the common ancestor of both hominines (hominids) and chimpanzees). They developed regional behavioural differences. The pre-history of primates and hominines show variations (east and west African chimpanzees, bonobo’s, and the lineage of hominines went through at least 18 different species before the human species emerged, 400,000 years ago). Homo sapiens also varied in their adaptabilities to local conditions.

Gatherers, opportunistically, also hunted small-sized animals (as do chimpanzees), later going after scavenged carcasses and, eventually hunted bigger game, assisted by primitive technologies – worked stones and wooden shaped weapons.

No individual designed these changes – those that worked assisted survival; those never tried left those who never tried at the inherited level of subsistence (for most hominid species, they had long histories, counted in hundreds of thousands of years before their extinctions).

Shepherding was picked up by minorities of local tribes, as was farming. The majority of gatherer-hunters/scavengers remained as they were as humans for most of the 400,000 year span lived by humans so far. As John Locke put it: 'in the beginning al the world was America’ (in reaction to the discovery by higher technology tribes of lower technology tribes still living as did our forebears in the forest). Even today, there are some isolated tribes still living off their surroundings as the whole world once lived.

The division of labour was not designed by anybody; it happened as individuals found it worked for them. Professor Frances Hutchison opined in his posthumous work, A System of Moral Philosophy (1755), that the leader divided up the tribe into separate jobs, which was solely from his imagination. Where did the leader get the idea from? Or was it discovered independently scores of thousands of times over and again across human societies?

Hence, I come back to the question of who invented capitalism, a question that must also explain how and why it took different forms across the globe among those human societies that had moved from pastoral subsistence to ‘towns and countryside’ and had survived and functioned in many different forms across Europe and Asia, from the Atlantic to China, with many examples of some societies collapsing (Mediterranean) or stagnating (India and China) and not sustaining (or reviving) into commercial societies, as happened in late-Medieval western Europe from the 15th century.

The rise of commercial civil societies in the 18th century is explained historically and how and why they went on into distinctive forms of capitalism from mid-19th century onwards.

Crediting an individual when there were many individuals thinking and contributing their ideas, is the folly of such assertions. Just because some key thinkers (Pufendorf, Chydenius, Quesnay, Cantillon, Turgot, List, Hamilton are less well known today is not a good reason to hand such a role to Adam Smith, who did not live long enough to codify how British capitalism (which evolved differently from Scandinavian, French, German, and US capitalism) evolved. Moreover, as much of his legacy had been heavily distorted, and confused with others (Mandeville, the Physiocrats, Ferdinand Lasalle, Marx, etc., - see my Adam Smith’s Lost Legacy, 2005: Palgrave-Macmillan) it is not difficult to rebut the idea that he ‘designed’ capitalism.

You ask: ‘Is it correct to say Smith devised his concepts within an ethic of thrift? I think so’.

I answer that it is a extreme generalization. ‘Thrift’ as you postulate is in Smith’s philosophy expressed as ‘frugality’, as opposed to ‘prodigality’.

Thackeray and others, (say, Trollope) noted the extravagant living of the upper-orders and saw the corruptions of the finance capital, which was the essence of late-19th century ‘capitalism’. Corruption was already evident in the South Sea Bubble, the East India Company, etc., in Smith’s time, in a relatively smaller–scale commercial society, and was more than evident in the decline of Rome. Adam Smith observed; he did not predict nor proscribe.

Capitalism evolved whatever Adam Smith or anybody else thought about the society they lived in. It has ever been thus; human nature is unchanging.

Dreaming Can Be Dangerous

Joe Campbell writes an intelligent Blog, 2parse (HERE):

He has hit on something quite important. He has come up against a discontinuity in one of histories certainties: Adam Smith’s ideas, as taught by academia, are quite wrong. There is a lot missing in the modern image of Adam Smith and what he was about.

Smith did not speak of capitalism because the word was not yet invented in English; in 1854 William Thackeray used the word, capitalism, for the first time in English in his novel, The Newcomes (Oxford English Dictionary).

Joe offers his “modest proposal for the day:

“Tear down our capitalist system and replace it with a free market.”

“The two terms are usually used synonymously – and I’m sure I am guilty of this myself. But after a long night of fevered dreams about politics and policy … I woke up realizing there is an important difference between the two ideas. (Perhaps as my unconscious mind dredged up some forgotten piece of writing from years ago.)

“The free market is a commonsensical idea – as it is based on the values of competition, individual opportunity, and liberty. Adam Smith (from what I know of him) was only a proponent of this system – which he called “the system of natural liberty” – rather than a proponent of “capitalism” – a term he never actually used. Smith – arguing for this system – argued against government being used to prop up industries or to direct them. What he did not argue for though was “capitalism” as it has been understood for the past century. In many ways, the idea of capitalism evolved to defend our system from Marxist ideas – so it evolved to preserve the status quo rather than to describe an ideal system.

“… Our economic system though was created in an ad-hoc manner – and the ideology which grew up to defend it lacked any clear ideals. So, this ideology was defined then by what it opposed rather than a positive protection of certain principles. Capitalism then means less government interference, less centralized control of the means of production, less regulation. What this capitalism has created though is a rather unfree market – in which a small number of individuals own most of the capital – in which competition is thwarted by monopolistic practices, by bigger and bigger mega-corporations, by regulations proposed by the mega-corporations to keep out competitors, by bailouts.

Our capitalist system is based on valuing capital over labor, of separating mangement and labor from ownership, of limiting the liability of individuals for their actions in corporate environments, of externalizing as much cost as possible to the public commons, of profit over all things. It is hard to see what most of these principles contribute to the creation of a free market. Indeed, many of them undermine it – creating a closed market, profitable only for a princely few who have the capital.”

Comment
Much of Joe’s thinking is well motivated but he is confused because he advocates root and branch transformation in a long-established socio-economic system, and that isn’t going to happen.

The sheer impracticality of it is breathtaking.

What do several billion people do while the transformation is agreed, let alone undertaken, should the very remote possibility of securing agreement happens?

What will those who believe they may lose from the transformation do about what they see as a bleak prospect? Would the political system remain neutral? Who has got the deepest pockets?

For these reasons I think a reminder of Adam Smith’s philosophical stance – do nothing but observe everything – is in order. Start with the stability of the society and propose practical changes that will slowly and gradually take affect without de-stabilising justice and society’s good order. Try to change your corner of the world oveer time but not the whole world in one go.

Also, avoid sleeping on rich food or strong drink, and don’t take seriously anything you remember about ‘a long night of fevered dreams’, no matter who she or he is.

Adam Smith and Capitalism

Paul Martin writes 'It isn't capitalism, it's greed' for Revolution Radio HERE:

“What we have is a bunch of greedy people who we, the people, have elected to office. Keep in mind that Adam Smith who created the capitalist system (just as Karl Marx created the socialist and communist systems that redistribute wealth) said that capitalism was a profit-motivated form of economics. He made it very clear that when greed became the driving factor behind an economy, it was not capitalism at work. It was greed.”

Comment
Much as I admire the life’s work of Adam Smith, to describe him as the person ‘who created the capitalist system’ is, well, breathtaking in its sheer ignorance, much as a teenager, or younger, looks in awe at favourite celebrities.

Smith observed and described, with more than a few conceptual flourishes of great merit, but he in no way at all ‘created the capitalist system’.

Indeed, he never knew anything of ‘capitalism’, a word invented in English for the first time in 1854 (Smith died in 1790).

Philosophers do not ‘invent’ systems and nobody invented ‘capitalism’ or the ‘commercial society’ which Smith described, and which had been around since long before he was born in 1723.

It follows that Smith did not make ‘it very clear that when greed became the driving factor behind an economy, it was not capitalism at work. It was greed’.

Of the two men mentioned, Adam Smith and Karl Marx, it may surprise some readers to realise that Adam Smith was far more condemnatory of ‘merchants and manufactures’ for their monopolising behaviours, out-right scheming against the public interest, and their corruption of the legislature, than Karl Marx was of 19th-century capitalists.