Always Remember Context

It is always important to understand the context in which Adam Smith refers to events and situations when taking quotations from Wealth Of Nations to make contemporary interpretations on what Smith wrote.

Sheldom Richman is posted (9 March) in eWallstreeter HERE

“Adam Smith vs. Crony Capitalism”

“The Scottish philosopher's suspicions about business people were well-founded.”

“I admit it: I like Adam Smith. His perceptiveness never fails to impress. True, he didn’t foresee the marginal revolution that Carl Menger would launch a century later (with, less significantly in my view, Jevons and Walras), but give the guy a break. The Wealth of Nations is a great piece of work.

One thing I find refreshing in Smith is his wariness of business people. This is something we ought to frequently remind market skeptics. Smith knew the difference between being sympathetic to the competitive economy—which he called the “system of natural liberty”—and being sympathetic to owners of capital (who might well have acquired it by less-than-kosher means, that is, through political privilege). He knew something about business lobbies.

This famous passage from book 1, chapter of Wealth is often quoted by opponents of the free market:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The quote is used to justify antitrust law and other government intervention. But as has often been pointed out in response, Smith had no such policies in mind. We know this because he immediately follows with:

“It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

Prime Beneficiaries

Government should do nothing to encourage or enable attempts to limit competition. But of course government does that all the time at the behest of business and to the detriment of consumers and workers. Hampering competition raises prices for the former and weakens bargaining power—and therefore lowers wages—for the latter. Those groups would be the prime beneficiaries of freed markets.”

Comment
Sheldom Richman’s selection of quotations is fine, given the points he want to make about “narrowing the competition”.

However, he misses the historical context of Smith’s critique of the behaviour of “People of the same trade” (WN I.x.c.27 145), which refers to the “incorporated towns” where the Elizabethan Laws relating to apprentices prescribed the number of boys training to become tradesmen at any one time (two only) and restricting who could trade as a Master (all former apprentices trained in the same town). It was the law imposed by government that sanctioned the legal monopolies that “narrowed the competition”.

Like many such laws, it’s original purpose was the worthy one of improving the quality of manufactured goods by raising the quality of training for those apprenticed to a “trade”.

Also, like many worthy intentions of legislation, its original purpose was diluted over the decades that followed, because the arrangements that it created led to prolonging an outdated Medieval system of seven-year apprenticeships, long after technology had moved on, which would have justified shorter apprenticeship terms and encouraged cross-trades’ integration and innovation, but the beneficiaries – those who had endured 7-year stints of low or no wages – were motivated into opposing all innovations, even to the point of social idiocy, because they benefitted financially and in job assurance.

For example, post-apprentice tradesmen, running their small workshops, and qualified only to make carriages, were not allowed to make the carriage wheels, the monopoly of which was separately apprenticed to others on 7-year terms, though their skills in time overlapped and carriage-tradesmen were competent in manufacturing either wooden carriages or wooden wheels. This restrictive practice, as ever in similar examples even until recently (try writing a screenplay for Hollywood without being a member of the Screen Writer’s Guild) added to costs and prevented price competition that would have lowered prices and increased the market for their products.

A young apprentice-trained instrument-maker, by the name of James Watt, from nearby Greenock, a few miles to the west on the River Clyde, was refused permission by the Glasgow Incorporated trades under the Elizabethan Acts (together with the local protestant Presbytery they more or less ‘ran’ Glasgow, ) to practice his instrument-making trade in Glasgow town. Adam Smith persuaded the University Senate to hire young Watt to service the many instruments used by the professors in their teaching and research, citing the legal fact that the University was ‘outside’ the jurisdiction of the Glasgow ‘trades’ and the Town authorities, a privilege shared by all four Scottish Universities in respect of their local towns.

Young Watt joined Glasgow University, was generously provided with rooms for his work and space for a laboratory, and regularly serviced and repair the professors’ mechanical equipment (no longer sent to town for repair, so the trades lost the University’s business) and one day in 1764, as history records, he was asked to repair the University’s model Newcomen steam engine. Well, as they say, the rest is history.

Did Adam Smith Ignore a Steam-Driven Pin Factory?

Michael Perelman, a thoughtful modern Marxist and author of a host of books on economics from a left perspective at California State University announced on a History of Economics Blog to which I subscribe that he has just published a new book, "The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers."

He says that the central theme of his book (“not suggested by the title”) is that economists frame their discipline by emphasizing transactions to the exclusion of considerations of production.

“Beginning with Adam Smith's pin factory, economists have tried to turn attention from production. I don't have time to explain it here, but his very clever presentation was dishonest, ignoring large industry, including a steam run pin factory.

“Those economists, beginning with Jevons, who have trespassed into the subject of production [something more than the purchase of the appropriate factors with the assumption that everything in the black
box will be performed efficiently] have been severely reprimanded.”

Comment
I first met Michael Perelman at a Summer School at George Mason University, Fairfax where he contributed a paper, which referred to Adam Smith.

Afterwards, we had a conversation where I offered my interpretation of some of the summaries he had made. Later, he kindly sent to me a draft copy of a paper he was writing that quoted Adam Smith fairly extensively. I sent to him my detailed comments, mainly technical, and saw him again at a History of Economics Conference in Toronto.

Perelman is an Marxist intellectual who converses without rancour, despite our differences on Adam Smith (we have not discussed Marx in any detail) and it was pleasurable to exchange views with him. I have ordered his latest book – he has written several (see Amazon).

I am not clear at the moment what he means by saying “economists have tried to turn attention from production”, though I am wary of ascribing to economists as a group some kind of collective intention (the discipline is far more open than Perelman implies) and also would ask ‘why’ they would do this. The discipline is also more argumentative than this image allows – differences on major issues, as well as minor nuances, would promote journal articles of disagreement without much prompting (Young Turks and Old Hands are too vigilant for such a consensus to emerge without a citation trail).

That is why I am intrigued by the reference to Adam Smith and his “trifling” example (Smith’s words) that Perelman describes as “his very clever presentation was dishonest, ignoring large industry, including a steam run pin factory”. There was not much “large industry” about in the 1760s-1770 (when Smith used the pin factory example of labour productivity – see his Lectures on Jurisprudence (1763) and Wealth Of Nations (1776). Smith was familiar with Dr Roebuck's Carron Foundry - he took Edmund Burke to see it.

That there was a “steam-run pin factory” would really be remarkable, given steam engines were largely the “Newcomens” crude engines in the coal pits. James Watt’s improvements were dated from the 1760s, like the inefficient Newcomens also for pumping water in pits. It would be more remarkable too, if Smith knew of a steam-driven pin factory and took no notice of it (was such steam-driven power source known to Diderot in his Encyclopedia?). Hence, I await the arrival of Michael Perelman’s new book in anticipation for the details.

As for Jevons (writing from the 1870s), long after Smith had gone, I have no comments to make. Does this mean that the ‘conspiracy’ to downplay production lasted at least a hundred years? Who was directing it?

Having said all this, I am sure that Michael will respond in his scholarly manner, and unlike many others, not resort to political posturing or preaching, which I think is in the best traditions of the Republic of Letters and why I have a lot of time for him.